How Goldman Sachs is advising its wealthiest clients

Sharmin Mossavar-Rahmani, chief investment officer for Goldman Sachs Wealth Management, joins Yahoo Finance Live to discuss the firm’s 2021 Investment Strategy Group’s (ISG) outlook.

Video Transcript

MYLES UDLAND: All right, welcome back to Yahoo Finance Live on this Friday morning. We're a couple minutes away from the opening bell here. Futures pointing to a lower open, though things again leveling out a bit in markets of the last couple of weeks.

Let's stay on the markets and talk a bit more about how some big firms and their wealthiest clients are thinking about markets today, investment opportunities. Sharmin Mossavar-Rahmani is the chief investment officer for Goldman Sachs's private wealth management group. We're also joined by Yahoo Finance's Julia La Roche.

Sharmin, thanks so much for joining the program today. And I'd love to begin with-- and we were chatting in our meeting this morning. Your group's latest note is about 100 pages. It has pretty much everything you'd want to know in there. I'm curious how you are, at the highest level, starting conversations with clients today, and what they're most interested in, what they're most concerned about in the current market.

SHARMIN MOSSAVAR-RAHMANI: We spent a fair amount of time, actually, on this report's cover, trying to make sure that clients can just look at the cover and actually, from that alone, get the key message.

So when you talk about a 100-page report, it's true there's a lot in there. But the key message is to reiterate what we've been telling our clients since the global financial crisis. So the cover is the flag of the United States in a map of the United States. And then we have a graph of the S&P 500 overlaid on that.

And the message to our clients is that that has been our investment theme, of US preeminence and staying invested, since March of 2009. S&P 500 is up over 600% since then, so a seven-fold increase in portfolio values. And our recommendation to stay invested with a preponderance of assets in US assets in the S&P 500 in terms of weights relative to, for example, emerging markets or other developed economies, is that message. And we keep on saying that that is still valid.

So the question our clients are asking us is, should those two themes still dominate their investments? Should they still believe in US preeminence, given the pandemic and some of these continued calls for the decline of the US?

And we want to very strongly reiterate that yes, our investment recommendation to stay invested is still totally valid. It's based on fundamental earnings. And US preeminence is still valid, and there is nobody that's even going to come close to challenging the US and its preeminence. And so, again, the preponderance of assets in the United States.

JULIE HYMAN: Sharmin it's Julie here. It's great to see you. We just saw Catcha Investment Corp ringing the opening bell. And I bring that up because it's a SPAC. Not surprisingly, I feel like four days out of five, when we take the opening bell, it's a SPAC ringing the opening bell.

And of course, even folks who still believe in the pre-eminence the US, in the US economic story, are still raising questions about relative valuations and about whether stocks can continue to outperform when you have some of these, perhaps, overenthusiastic behaviors around things like SPACs, around IPOs, around meme stocks and Bitcoin, et cetera. How are you thinking about that issue?

SHARMIN MOSSAVAR-RAHMANI: Clients have been asking the question about whether we're in a bubble over the last several years. So we've been actually focusing on that, you could say, since 2015, 2016 in our outlooks, mentioning why we don't think US equities are in a bubble.

So how should one actually look at US equities? First and foremost, we show clients that when you're in periods of low and stable inflation, which we have been in the United States since April of 1996, market valuations are generally higher.

And intuitively, that makes sense. If you have a lot more visibility into the stability of a company's earnings, investors will pay a higher price for that. If you have lower interest rates because you have low and stable inflation, then clients will pay a higher price for that earnings yield that is available through equities.

But we need to look at valuations today relative to the averages since April of 1996. So equities are expensive, but not so significantly overvalued. In fact, we have a chart-- we look at a metric called explosive price behavior, and we actually don't see that in equities. Typically, it has to get to 90% to 100% for us to believe that we're in a bubble. We're now at 26%, so a long way away from being in bubble territory.

And when we think of overvaluation, we are somewhat overvalued, but if you think about the earnings trajectory we have for 2021, relative to what we saw last year, one has to recognize that we're going to have a very nice earnings recovery. We're going to have well above average growth in the US. And we're going to have very supportive fiscal and monetary policy. So that's actually a good combination for an equity market, that our base case is up 8% with some probability that it could be up in the mid-teens. But we don't think it's in a bubble.

In addition, we have been telling our clients, valuation alone is not a great signal for going underweight equities. So from March of '09 to the present, we have not once told our clients to go underweight equities. We've gone overweight, like we did in February and March of last year, but we've never once gone underweight. The hurdle to go underweight should be very high for investors.

JULIA LA ROCHE: And Sharmin, I think it was like 98 times that you reiterated this to your clients since the great financial, global financial crisis-- I do want to talk about some risks. And one in particular that you highlighted was this potential for a tech backlash.

Of course, when we look at the market, sometimes the narrative out there is that there's a handful of names-- I'm referring to the FAANG stocks and a few others-- that have been driving returns. How do you think about that risk, and what are you telling clients?

SHARMIN MOSSAVAR-RAHMANI: Obviously, that's top of mind as well, especially as people think of all the regulation that could happen. Our view is that one has to be vigilant about all the risks that we've outlined. But relative, for example, to the risks of the uncertainty of the pandemic, it's low on the list.

In addition, we think that when people think about regulation for tech companies, any antitrust regulation, these things take a long time. If we go back and look at history-- and from our perspective, history is a very useful guide. It's one of the key pillars of our investment philosophy. So if we look at antitrust history in the US, these efforts to regulate companies takes a very long time, especially when it's very complicated among tech companies. So we think it's a small risk and not something that would derail the S&P 500 and the FAANG stocks.

JULIA LA ROCHE: And of course, I know when we spoke recently back in 2018, in the ISG outlook, you all did talk about cryptocurrencies, Bitcoin. This week, there's been a ton of news on this front, from Tesla's Elon Musk putting it on the balance sheet there, to MasterCard, you name it. A lot of folks have been talking about it. How are you talking to clients about Bitcoin, and could it play a role within a portfolio?

SHARMIN MOSSAVAR-RAHMANI: Obviously. with all these headlines over the last, I would say, several months including this week, we're getting a lot of questions. Clients are trying to understand how they should think about it.

Our view is that when you're looking at strategic asset allocation for a client, and we customize that for every client, it has to be thinking of the long term and have core assets in it. If you think about the S&P 500 increasing sevenfold since March of '09, that's a core asset that one could invest in with a significant portion of one's assets.

If people want to be more speculative and trade, they can certainly do that. We can't say clients shouldn't be thinking about that. But for us to think about it as a core asset in a portfolio with a significant role to play, we have to be certain about the risk characteristics. We have to have confidence in cash flow generation. We have to have confidence in an asset class being a deflation hedge, like bonds, being a great inflation hedge like, in fact, the S&P 500.

The S&P 500 is probably one of the best long-term inflation hedges out there. And when we think about long-term returns for the S&P 500, for clients who have a long investment horizon and can withstand some interim volatility, it's probably the best long-term asset to own. And so that's how we try to help clients think about it.

MYLES UDLAND: All right. Really interesting conversation on the back of what's been a very interesting and chaotic market of late. Sharmin Mossavar-Rahmani, chief investment officer for Goldman Sachs's private wealth management group. Sharmin, thank you so much for joining the program today, spending some time with us.