Goldman Strategy: No Dip, Double Up

Goldman Sachs Investment Management is recommending to its high net worth clients that they keep a long-term focus and stay fully invested, even amid the growing correction in equity markets and the louder calls for a double-dip recession.

In a report entitled 'Double Dip or Double Up?' that is being bandied about on trading-room floors today amid the rally, Goldman’s strategy group (not associated with their research division) cites the rarity of a double dip retrenchment, flaws in bearish technical analysis, policy overhang and cheap valuations as reasons for its bullish long-term view.

“Even slow 1-2 percent GDP expansion would be sufficient to generate positive earnings growth from current levels,” states the report. “We believe that clients should continue to use market weakness to build toward or maintain their strategic equity allocation.”

Stocks rose for a second day today following a seven-day losing streak that came amid poor economic data on housing, manufacturing, as well as a delay in the Senate vote on financial regulation. Earnings season unofficially kicks off next week when Alcoa becomes the first Dow member to report second-quarter figures.

The report points out that a double dip recession has happened only twice, in 1981 and 1931, with a tightening of monetary policy the common denominator in both. “We believe that it is highly unlikely that the Federal Reserve will tighten monetary policy anytime in the foreseeable future.”

Not all investors agree in this thesis. “Just because double dips are rare does not mean they cannot occur,” argues Brian Kelly, founder of Kanundrum Capital. “The distinguishing characteristic that makes this recession and recovery different is the popping of the credit bubble. Credit is the engine of the economy and has been growing exponentially since WWII – it is now declining. Without credit growth, the past assumptions about an “average” recovery are completely invalid.”

Goldman’s strategy group is part of its asset management division, which holds more than $800 billion in assets. Using their assumption for S&P 500 earnings, they get a market price-earnings ratio of 12.7, 15 percent below average, they said.

To be sure, the group is recommending clients that can’t stomach any further short-term losses stay conservative. Ironically, they cite the heightened uncertainty from the delay in financial reform, a process that will very much effect this group’s parent and arguably a reason why Goldman Sachs shares rebounded last week.

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