Goldman Sachs (GS) private wealth advisors just gave its wealthy clients the same advice it has for the last 10 years — stay invested in U.S. stocks.
"We have had a strategic overweight to US equities relative to market capitalization-weighted benchmarks for the last ten years, and this overweight has served our clients well," Sharmin Mossavar-Rahmani and Brett Nelson wrote in their 2019 outlook, a 102-page report entitled "American Preeminence in a Rattled World."
The note was circulated to Goldman’s Consumer & Investment Management Division, which has recently combined the firm’s upstart consumer lending and savings business, Marcus, with its long-time asset management business that manages more than $1 trillion dollars for institutions and ultra high-net-worth individuals.
The recommendation of overweight U.S. stocks dates back to 2009, during the height of the great recession. The firm has remained overweight U.S. equities ever since, and to date, it's been a good bet.
Since the trough in March 2009, U.S. stocks have returned about 355% (16% annualized) compared to 169% (10.2% annualized) for non-U.S. developed markets and 161% (9.9% annualized) for emerging markets, Goldman noted. Even with 2018's -4.4% performance, U.S. equities outperformed other markets, with non-U.S. developed markets returning -10.5% and emerging markets -14.2% for the year.
"We believe this strategic overweight is still warranted. While the U.S. is not immune to developments beyond its borders, the country is better positioned to weather future storms than virtually any other. It is also sufficiently resilient to absorb uncertainty from within."
"The U.S. remains preeminent, and its institutions are stronger than any one president or administration.”
In the note, Goldman recognized that the current levels of angst among investors hasn't been present since the early stages of the global financial crisis. Interestingly, this angst is happening against a backdrop of the strongest GDP growth in a decade, robust earnings growth, the lowest unemployment rate in 49 years, and core inflation at 2%.
That said, investors are worried about the end of a decade-long economic expansion, a slowdown in Europe, Japan, and China, volatility in equity markets, rising interest rates, and a trade war. There's also uncertainty stemming from the Trump Administration, including the investigations, high cabinet turnover, and the president's comments about Fed Chair Jay Powell.
Goldman, however, reminded its clients that the U.S. had faced similar challenges in the past.
"The U.S. remains preeminent, and its institutions are stronger than any one president or administration," Goldman wrote. "Furthermore, we do not believe that the relative cheapness of other developed and emerging market equities is sufficient to prompt a tactical shift."
Goldman acknowledged that some of its clients "have reacted to the Trump presidency with great concern" and asked whether he could derail the U.S. preeminence. Goldman highlighted the strength of U.S. institutions as a pillar of U.S. preeminence, pointing to instances where states or the private sector have stepped up on issues ranging from the environment to immigration.
The bottom line: remain overweight U.S. equities.
"In our base case, with a 55% probability, we expect a total return of 9% for the S&P 500 in 2019. Should our good case materialize, which has a 25% probability we expect a total return in the high teens. In our downside case, with a 20% probability, we expect a total return of -18%. The downside scenario could occur because of a recession caused by further Federal reserve tightening, an exogenous shock or simply investor fear of staying invested too long."
But, it’s also important to stay alert about the risks that could hit the market.
"While we believe that our view of U.S. preeminence is still valid, we do not believe that the U.S. economy can be insulated from the undertow of domestic policy uncertainty, trade wars and global geopolitical tensions," Goldman wrote, "The U.S. is simply better positioned to weather a storm than are other countries, and U.S. assets are more likely to outperform non-U.S. assets."
Goldman added that the odds of a recession remain low.
"The next key question is whether the likelihood of a recession has increased enough to warrant an underweight to U.S. and non-U.S. equities. Without the benefit of the proverbial crystal ball, it is difficult to have a view with near-total confidence; however, we believe that the likelihood of a recession, while higher than our 2018 forecast, is still low."
The odds of a recession currently sit at 15-20%, up from last year’s probability of 10%. That’s also above the historical probability of 11%, looking at data going back to 1981, the firm added.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.