Goldman says market correction risk is rising, but a bear market is unlikely

Published Tue, Jan 19 202112:01 PM ESTUpdated Tue, Jan 19 20211:22 PM EST

The major averages have clawed back their coronavirus-induced losses and hit record highs in January, but Goldman Sachs believes a pullback may be coming. "In our view, there is a risk of a correction," the firm said Tuesday in a note to clients. "Our risk appetite indicator, designed to highlight changes in market sentiment and vulnerabilities to tactical corrections, is at elevated levels suggesting a correction is increasingly likely." However, the strategists, led by Peter Oppenheimer, noted that a bear market doesn't seem to be looming. This is because the firm's bull/bear indicator, which seeks to track major inflection points, is sitting at relatively neutral levels. Goldman said it believes stocks are in the early stages of a bull market, with the first explosive stage of recovery that tends to start in a recession now in the rearview mirror. Given forecasts for synchronized global economic growth as worldwide economies recover from the pandemic, Goldman believes any correction represents a buying opportunity for investors. "While the rebound has been sharp, it is not unprecedented … the recovery in equity prices from the trough in the financial crisis in 2009 was almost identical to the rebound since the trough in 2020 over a similar time period," Oppenheimer said But he added that during the financial crisis, a correction followed the initial sharp rebound for equities. This time, the lower starting level for bond yields paired with higher valuations might have led some to believe the run from the March lows would have been more muted. However, Goldman pointed to the event-driven nature of the pandemic as well as the unprecedented speed and scale of policy support as propping up equities. This led to investors looking through the downturn and into the recovery stage. But investors are now complacent, according to Goldman. "The market is rising on good news but choosing to largely ignore weaker data and rising infection rates. Rapid fund flows and highly correlated risk assets make a correction in the near term increasingly likely," the firm said. Goldman's conviction that any correction won't snowball into a full-fledged bear market rests on two of the firm's proprietary market measures: the risk appetite indicator, and the bull/bear market indicator. "While the nearer-term risks may be rising, this does not mean that the risks of a major drawdown or bear market are high. In fact, from a cyclical rather than a tactical perspective, we believe that we are in the relatively early stages of a bull market," the firm said. - CNBC's Michael Bloom contributed reporting.