The speedy return of market confidence following a dramatic global sell-off in risky assets should be seen as a cause for concern, according to the head of asset allocation research at Goldman Sachs.
Speaking to CNBC’s “Squawk Box Europe” on Wednesday, Goldman’s Christian Mueller-Glissmann said investors could think about the early August stock slump as something akin to “a warning shot.”
Stock markets kicked off the month under intense pressure, as concerns over a possible U.S. recession and the unwind of popular “carry trades” linked to the Japanese yen pulled stocks off their record levels. The S&P 500 lost 3% on Aug. 5, notching its biggest one-day drop since 2022.
Since then, however, expectations of imminent interest rate cuts from the Federal Reserve and improving U.S. economic data have sent stocks soaring. The S&P 500 has jumped 8% since Aug. 5, while the Dow Jones Industrial Average has climbed more than 6%.
“Going into this, you had like one or two months where positioning and sentiment was at the upper end of the range. People were bullish,” Mueller-Glissmann said.
“We were actually worried about a bit of a correction because at the same time, while you had bullish positioning, momentum on the macro was a bit weaker. You had negative U.S. macro surprises for like 1½ months before that, and you actually started to see Europe and China macro surprises turn negative as well,” he added.
“What’s concerning now is how quickly the market has gone back to where we were before … but certainly that shows that we are sadly nearly back to the same problem we were at a month ago.”
‘A huge technical overreaction’
Market participants are currently awaiting the release of a key U.S. inflation report to get a better picture on the health of the world’s largest economy. U.S. personal consumption expenditures price data, the Federal Reserve’s preferred inflation gauge, is scheduled to be published on Friday.
It comes after Fed Chair Jerome Powell said late last week that “the time has come for policy to adjust,” bolstering expectations for a rate cut at the central bank’s Sept. 18 meeting. Powell declined to provide exact indications on the timing or extent of the cut.
Asked where that leaves risk appetite for the coming months, Mueller-Glissmann replied, “What happened on Aug. 5 and around there was obviously a huge technical overreaction … so that was a buying opportunity.”
He said the current challenge for market participants is that stocks and risky assets have “completely reversed” losses to get back to where they were before.
“What I find quite interesting is risk appetite is not back to where we were before and what actually happened is that safe assets — bonds, gold, yen, Swiss franc — they have actually not sold off,” Mueller-Glissmann said.
“What I would say is the good news is while the S&P is back to where we were before, the complacency isn’t. We’re not at the same kind of extreme bullish sentiment and positioning.”
What’s next for investors?
Mueller-Glissmann, who had previously advocated for a 60/40 portfolio, noted that a balanced portfolio performed “phenomenally” throughout a choppy month for markets. Yet, he cautioned that the recent buffer provided by bond markets may not be quite as reliable in the near term.
“If you think about it, the bond market buffered most of the drawdown. If you look at the 60/40 portfolio, it was a blip. The max drawdown was I think 2% for the U.S. or the European balanced portfolio. So, in other words, the bond market balanced equity as we were hoping it would,” Mueller-Glissmann said.
“I would say considering that you don’t have as much buffer currently from bonds, tactically maybe you want to be a bit careful about your risk portion, especially after this run,” he continued.
“There’s different ways to deal with this, either you trim it a bit … or you could create alternative diversifiers, it could be liquid alternatives, it could be option overlays, things like that.”
