Why Goldman Sachs' call for a new bull market rings hollow
Aug 7th 2009 12:00PM
Updated Dec 4th 2009 1:44PM
Goldman Sachs (GS) is making headlines again, this time for two macro calls on the economy. Jan Hatzius, Goldman's Chief U.S. Economist, raised his target for GDP growth in the second half to 3.0 percent from a prior target of 1.0 percent. At the same time, Abby Joseph Cohen, the firm's senior investment strategist, said on CNBC that, "we do think the new bull market has begun," and predicted that the S&P 500 will rise an additional five to 10 percent this year to trade in a range of 1,050 to 1,100.
"Clearly, many people were looking for better signs on the economy, and we're now getting them. Not every sign is positive, but we've seen an upturn . . . the labor news is better, it's still not good, but it's better than it was," Cohen said. The Labor Department announced today that job losses in July came to 247,000 -- the lowest number of the year -- and the unemployment rate dipped.
But just because Goldman Sachs is the most profitable firm on Wall Street doesn't mean their calls should be accepted without scrutiny. And in this case, their reasoning is not bulletproof.
What has been largely ignored in reporting this so far (except by Zero Hedge) is that Goldman lowered their forecasts for GDP growth toward the end of 2010 because the catalysts are not indicative of organic growth, but rather economic activity being pulled into the present. "After this near-term spurt, the economy is likely to slow anew in 2010; in fact, we now expect the second half of 2010 to show a bit less growth than the first. This is because [inventories and fiscal policy] will peter out next year, the consumer still faces substantial headwinds, and a 'traditional' recovery in housing and capital spending is unlikely given the massive overhang of empty homes and unused capacity," Hatzius wrote in a note obtained by DailyFinance.
Hatzius also said that he expects 10.5 percent unemployment, zero inflation, and a zero Fed Funds rate at the end of 2010 -- not exactly the green shoots some are taking the raise headline GDP growth to be. End demand from struggling consumers is likely to be weak enough to cause Congress to pass additional stimulus next year, he added.
Considering this economic outlook, it's surprising that Abby Joseph Cohen said the firm favors cyclical names in energy, technology, and financials. Larry Kudlow, who has never seen a market or economy he wouldn't crow about, is right that the short end of the yield curve being at zero helps financials -- as DailyFinance has noted in the case of Citigroup (C) and U.S. Bancorp (USB). At the same time, the financial sector is shrinking, and competition is remaining the same because failure is not allowed, which is not the recipe for great long-term profitability. Goldman's market strategists have been off before, and I think the best point made by Cohen would be at the very end, when she explains that most of the poorly-performing companies have now been kicked out of the indices, leading to an "optical illusion" that things are getting better. The survivorship bias rally, then, rolls on.
James Cullen edits and writes at CollegeAnalysts.com. He is the Vice-President of the Boston College Investment Club, which owns GS, but has no personal position in the stocks mentioned above.