Harry Truman’s Dream of a One Handed Economist Unfulfilled by Goldman Sachs Report

Perhaps the most interesting point made in a Goldman Sachs report out this week is contained in its second sentence: “It is axiomatic that the economic backdrop influences investing decisions but the range of client views on growth and margins is unusually broad.”

The Goldman Sachs booth on the floor of the New York Stock Exchange
Getty Images
The Goldman Sachs booth on the floor of the New York Stock Exchange

Let’s try to parse that.

Goldman Sachs representatives traveled to a series of cities to have conversations with investors about the economy and the current business landscape. The result of those conversations was quite a mixed bag: Bullish investors took comfort in positive economic data, while the bears saw evidence of a double dip recession. This subhead provides a typical example: “No common ground exists regarding the outlook for profit margins.”

Adding to the uncertainty, a midterm election looms ahead on November 2. The report notes that midterm elections have historically been an inflection point for the S&P 500. Contributing further to the uncertainty, the GS report points out that 38 seats in the House are a “toss-up”. (Taken a step further, my back of the envelope math indicates that the 38 toss up seats puts the control of the House in the “toss-up” category as well.) So not much to hang your hat on there either.

The report goes on to say that, historically, a change of control in the House or Senate, results in a one year average positive gain of 11% in the S&P 500. (Except when it doesn’t: The report lists the range of S&P returns as between -4% and +33%.)

Nonetheless, we are told that these midterm elections “will have important implications”. For example: “Many clients view the prospect of a divided Congress as positive for equities in terms of reduced legislative uncertainty.” We are then advised, perhaps somewhat paradoxically, that “Simply put, investors believe gridlock is good for markets.”

And, after reviewing Goldman’s tabular data forecasts, one might further note a 50% differential in the total combined S&P 500 Operating EPS estimates between a top down and bottom up approach.

In short, the report seems hedged and counterbalanced to an extent generally associated with the diplomatic remarks of Queen Elizabeth.

But perhaps I just need more coffee…

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