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S&P 500 not yet pricing in a US recession: Goldman

Timothy Moore
Even though the S&P 500 has plunged into a bear market, Goldman Sachs’ David Kostin says he does not see a recession as “fully” priced in.

“Equity returns imply a slowdown in economic growth rather than a recession,” Kostin wrote in his weekly US Kickstart note.

“Defensives have outperformed cyclicals during the past month and the pair now trades at a level consistent with a pace of real US economic growth of roughly 1 per cent, in line with the most recent reading of our economists’ US Current Activity Indicator.”
Regarding valuations, multiples are far from depressed, Kostin says. The S&P 500 YTD decline has dragged the P/E multiple for the index from 21 times to 16 times, which still ranks in the 64th percentile of valuations going back to 1976. For context, the P/E narrowed to 13 times in the recession of 2020 and fell to 9 times in the recession of 2008.

As for volatility, there’s more than meets the eye, according to Goldman’s analysis.

“This year’s path into bear market territory has been especially volatile when compared with previous sell-offs. A hallmark of this year’s volatility has been the frequency of sharp price moves at the index level.

“Roughly 20 per cent of trading days this year have seen the S&P 500 experience a price move greater than 2 per cent [versus an average of 8 per cent of annual trading days during the past 20 years]. In 2022, the VIX has averaged 26, peaked at 36, and now registers 33.

“Although this year’s VIX readings may appear low relative to readings of 80 plus during the GFC and March 2020, our volatility strategists have shown that current and persistently high levels of volatility are, in fact, elevated compared with previous selloffs.”


Commodities whacked by fears of economic slowdown

Alex Gluyas

Commodities posted sharp declines last week amid ongoing concerns of an economic slowdown as sentiment continues to be rocked by the prospect of aggressive tightening by central banks.

Base metals led the commodity market lower last week. Copper suffered its biggest weekly drop since October as the Federal Reserve lifted rates by 75 basis points.

Meanwhile, iron ore futures in Singapore ended the week down nearly 12 per cent, hitting levels not seen since January, as China’s zero-COVID strategy raised concerns that industrial activity will continue to take a hit.

“Soft demand for steel is forcing mills to extend maintenance periods in areas such as Tangshan. Inventories of finished steel products are also rising,” said Daniel Hynes, senior commodity strategist at ANZ.

Crude oil futures tumbled sharply on Friday to end the week down almost 10 per cent amid the gloomy economic backdrop.
“For the moment, disruptions to oil supply are taking a back seat to concerns of weaker demand,” Hynes said. “However, the fundamental picture remains one of tightness amid the ongoing slowdown in Russian output.”

Market highlights

• AUD -1.6% to 69.32 US cents
• Bitcoin at $US20,388.75 on bitstamp.net
• On Wall St: Dow -0.1% S&P 500 +0.2% Nasdaq +1.4%
• In New York: BHP -4.1% Rio -5.1% Atlassian +7.7%
• Tesla +1.7% Apple +1.2% Amazon +2.5% Meta +1.8%
• In Europe: Stoxx 50 +0.3% FTSE -0.4% CAC -0.1% DAX +0.7%
• Spot gold -1% to $US1839.39 an ounce in New York
• Brent crude -5.5% to $US113.26 a barrel
• US oil -6.5% to $US109.90 a barrel
• Iron ore -5.7% to $US122.15 a tonne
• 10-year yield: US 3.23% Australia 4.13% Germany 1.65%