Goldman Sachs: Recession fear overblown, market to gain 11%

Very little risk of recession: UBS economist
Very little risk of recession: UBS economist   

Swelling recession fears are creating both an extended stock market sell-off and an opportunity for investors ready to pounce, according to Goldman Sachs.

The firm's strategists believe investors have become too fearful of the U.S. economy, which ended 2015 with barely any growth in the fourth quarter. A fear-driven sell-off has resulted in the S&P 500 slumping 10 percent from its December high, a decline Goldman felt would bring in buyers.

However, buyers have stayed away, with last week's market gains doing little to boost confidence.

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Goldman clients "almost universally expressed a desire to buy the market 10 percent lower," but have refused, owing to five main reasons, David Kostin, Goldman's chief U.S. equity strategist and others said in a note: Fear of catching the proverbial falling knife; a contraction in U.S. manufacturing and industrial activity bringing down consumers; reduced business investment from the plunge in oil prices; China's slowdown triggering global deflation; and a need for equity prices to decline even further "to offer an attractive risk-adjusted return given heightened economic and market risks."

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

"Despite the generally positive U.S. economic data, the sudden fall in asset prices has investors focused on the potential for a U.S. recession," Kostin wrote. "Clients understandably point to the stock market as a cause for concern, and wonder what the market has come to know in early 2016 that they do not."

Goldman, though, is sticking with its forecast that the S&P 500 will rebound and finish the year at 2,100, a rise of about 11 percent from current levels but basically no net gain for the full year.

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The forecast is predicated on gross domestic product growing 2 percent and the Fed hiking rates four times, the latter possibility standing virtually no chance of happening according to current futures market levels.

Still, the firm believes a conservative approach to the market will allow investors to navigate through.

"For investors who do not expect a U.S. recession, the current S&P 500 correction provides a buying opportunity," Kostin wrote. "For investors concerned about a recession in 2016, our recommended strategies of strong balance sheets and domestic sales exposure should deliver relative outperformance even in the event of an economic downturn."

Investors thus far in 2016 have shown conflicting positions, according to a recent analysis from Bank of America Merrill Lynch. Bond inflows at the highest levels in 12 months indicate recession positioning, while equities outflows of more than $25 billion represent concern but not panic.