Aug. 20--Flat is the new up.
That's how Goldman Sachs is describing the rest of this year for the stock market. Goldman's view may be reassuring to investors unnerved by the stock market's roller coaster ride since July when China started to look like a threat to the global economy.
Yet you have to wonder: Is this damning with faint praise? Flat isn't much of a reward for the risk involved in investing in the stock market. Besides, you can get "flat" performance from savings accounts and as much as 2.4 percent by hunting for the unusual five-year CD on sites like www.bankrate.com.
Flat, of course, isn't new in the stock market this year. The Standard Poor's 500, which measures the performance of 500 large U.S. stocks, is up just 1 percent for 2015. The Dow Jones industrial average, for 30 blue chip stocks, has lost 2.66 percent this year.
By year end Goldman Sachs strategist David Kostin expects the Standard Poor's 500 to be at 2100, just slightly over Wednesday's 2,079.61.
Kostin thinks it only reasonable for investors to encounter a nothing year in the stock market. In stock market lingo, he says investors should expect a "reversion to the mean." That term means that if stocks go through a period of extraordinary climbs, eventually they have to hesitate or drop to a level that evens out the extreme swing.
In a note to clients he says the Standard Poor's has delivered an oversized return to investors during the last three years -- an 18 percent compound annual price return. During the past five years, the annual gain has been 13 percent, which Kostin notes is "well above the long-term average annual return of five percent."
"Mean reversion is a powerful force," said Kostin. "Put simply, flat is the new up when it comes to the future path of the U.S. stock market." During the next 12 months, he is expecting the S 500 to climb less than 4 percent to 2150.
Beyond the argument that stocks have to relax after a huge winning streak, Kostin points out factors working against continued near-term gains: Stock prices are high compared to likely corporate profits, companies are delivering very little earnings growth, investors have been taking money out of mutual funds and exchange traded funds rather than increasing their investments, and the economy is growing only modestly.
Investors have been on edge this summer as China's economic troubles became undeniable and as the Federal Reserve appeared to be on the verge of raising interest rates for the first time since the financial crisis started sending the stock market into a 58 percent plunge. The belief that the Fed would use low interest rates to cure what's ailed the economy and stock market propelled the Standard Poor's 500 up about 200 percent after the financial crisis lows of 2009. But investors are living in dread now of what an interest rate increase will do at a time when China, the world's second-largest economy, is pulling down the global economy while the U.S. is growing only modestly.
In a survey of global fund investors this month, Bank of America Merrill Lynch found fears of a global recession climbing among professional investors. Still, even with concerns rising, only 6 percent anticipate a recession, and most expect the U.S. to grow at 2.4 percent.
That's not robust growth but also not a recession. Serious downturns in the stock market of 20 percent or more typically do not occur unless there is a recession. Yet short-term downturns of about 10 percent -- known as corrections -- can happen when stocks rise to pricey levels that seem too extreme given likely corporate profits.
Stocks also can tumble somewhat when the Federal Reserve raises interest rates.
On Wednesday, the minutes from the Fed's Federal Open Market Committee (FOMC) did not provide investors clear direction about when an interest rate rise would arrive. After the release of the minutes the stock market rose as investors thought the Fed might wait beyond September to raise rates; then it dipped when others thought the rate increase will arrive in September.
"A September rate hike still looks like a distinct possibility," said Capital Economics economist Paul Ashworth. While the Fed noted that "conditions were approaching the point" when a rate increase would occur, the Fed also said the committee is still looking for "firming" in the labor market and inflation.
Goldman Sachs is anticipating the first Federal Reserve increase in December. Kostin said in the note that was issued before Wednesday's Fed minutes release that he has been surprised by the number of questions from clients asking if a U.S. recession is likely in 2016.
Although the "magnitude of the recovery is weak," he said he does not expect a recession. Because the recovery has been slow six years after the recession, he thinks the U.S. expansion is still early or midway through a continuation of the cycle.
gmarksjarvis@tribpub.com
