Goldman Sachs, in a sweeping report to clients Wednesday, said it is an once-in-a-lifetime opportunity to buy stocks, which the firm said are undervalued after 20 years of relative underperformance against bonds.
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The Goldman Sachs booth on the floor of the New York Stock Exchange
“The prospects for future returns in equities relative to bonds are as good as they have been in a generation,” wrote Peter Oppenheimer, the firm’s chief global equities strategist, in the 40- page strategy paper.
“Given current valuations, we think it’s time to say a ‘long good bye’ to bonds, and embrace the ‘long good buy’ for equities as we expect them to embark on an upward trend over the next few years.”
The call follows an extraordinary decline in bonds and subsequent back-up in interest rates this month and comes as the S&P 500 is within 10 percent of a record high and has more than doubled from its 12-year low reached three years ago on March 9, 2009.
The 10-year Treasury yield, meanwhile, has risen more than 30 basis points (0.3 percentage point) in a week to near 2.4 percent.
Goldman says equities have gone through a tremendous “de-rating” over the last decade due to the collapse of the technology bubble, the worst credit crisis since The Great Depression, a monster inflow into Treasurys by emerging market countries with surplus savings and a scramble by pension funds and insurance companies for the few risk-free assets left.
“The onset of the credit crunch, and the deleveraging of balance sheets in many developed economies that followed this have punctured the confidence that once surrounded equities, and the pre-1960s skepticism about equity returns has returned,” wrote Oppenheimer and partner Matthieu Walterspiler. “Dividend yields are once again above bond yields and both historical, and expected future returns have collapsed.”
The report shows a number of charts that illustrate that the annual returns of equities in excess of bonds over rolling 10 and 20-year periods are among their weakest since the 1900s. Meanwhile, the real return in 10-year U.S. Treasuries rivals the move following the great stock market crash of 1929.
Despite taking many reputational hits since the credit crisis (most recently by an exiting employee in an New York Times Op-Ed last week), Goldman Sachs still has fierce loyalty among its wealthy clients, who tend to follow its calls. If they and others follow this one, it could mean the S&P 500 add to its 12 percent gains already this year.
Goldman lays out risks to its bold call for a rotation into equities, including austerity measures, deleveraging by banks and consumers, as well as aging demographics in developed countries. However, it makes the case that strong corporate balance sheets and population growth from emerging economies are more than enough to justify higher valuation for stocks and avoid a Japan-like period of economic stagnation.
“Our global projections show that the next decade is likely to be a peak period for global growth,” states the report. “If future economic growth is, indeed, stronger, then again the lower expectations currently priced into equity markets is likely to prove too pessimistic.”
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