MW Here are the moves to make to counter range-bound, choppy markets, says Goldman Sachs
By Jamie Chisholm
Critical information for the U.S. trading day
Early Friday stock-index futures are looking chipper, though all that could change if the nonfarm payrolls report points to a sturdy labor market producing higher wage inflation.
The source of the nascent session's optimism is a 6% pop in shares of Apple $(AAPL)$ after the iPhone maker revealed better-than-expected earnings, gave an upbeat outlook, and proposed another $110 billion in share buybacks.
Apple may not carry the broader market sentiment-heft that it did a few years ago, but it's still the S&P 500's SPX second biggest company with a 5.8% weighting, so having a regular buyer of such size lurking is positive for the wider stock barometer.
And generally positive on equities is how to describe the Global Opportunity Asset Locator team at Goldman Sachs, led by Christian Mueller-Glissmann.
In a note published Friday, they acknowledge that the macroeconomic backdrop has "turned less friendly" because of sticky inflation in the U.S. and subsequently upward pressure on bond yields.
But nevertheless they say "our baseline remains friendly for the rest of the year. While our business cycle indicators still point to a late cycle backdrop, those can last a long time and equities can do well if there is no recession."
Consequently, the Goldman GOAL team are keeping their overweight call on stocks for both the three- and 12-month horizons, but are underweight credit.
Elevated profit margins, broadly strong balance sheets and corporations returning more cash to shareholders make stocks attractive.
"[W]hile rising bond yields currently reduce the potential for equity valuation expansion, we still see potential for corporate releveraging, which can support equity vs. credit," says the GOAL team.
They recommend diversification, with exposure to "defensive, quality and growth together with deep value."
However, they do warn that equity volatility could remain elevated until inflation starts to fall again and vacillations in bond markets abate.
"With less support from monetary policy easing, risk appetite needs more support from growth," says the Goldman team. "Rising bond yields increase the hurdle rate for growth to support risk appetite. And if strong growth comes alongside stronger inflation data, rising rates further increase that hurdle rate - this points to more range-bound, choppy markets," they add.
So, what to do about this? Well, first, to escape the recently tighter equity/bond correlations, Goldman says to move overweight cash on a three-month view in order to reduce that portfolio risk.
In the event of a big correction in stocks, some of the $9 trillion of assets in money market funds could flow into equities.
And second, Goldman suggests going overweight commodities, which can "help diversify both geopolitical risk and overheating when late cycle - performance should be further supported by low inventories, deficits and backwardation."
Backwardation occurs when the spot price of a commodity is more expensive than contracts further into the future. Goldman sees an opportunity to capture this "high roll yield" by buying futures in oil (CL.1) given recent pullbacks in the price have created "an entry opportunity".
Similarly, gold (GC00) has been volatile in recent days on hopes for easing geopolitical tensions, but the GOAL team has a target of $2,700 an ounce by year end, powered by central bank purchases and demand from China.
Goldman are particularly bullish on copper (HG00) with a $12,000 per metric ton 12-month target and aluminium with a $2,700 per ton target as "demand should be supported by the global manufacturing pick-up and the green transition, as well as structural under-supply and extremely low inventory."
Markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is a tad lower, while oil prices (CL.1) slip and gold (GC00) is trading around $2,300 an ounce.
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The buzz
The April nonfarm payrolls report will be published at 8:30 a.m. Eastern. Economists forecast that a net 240,000 jobs were added, down from 303,000 in March. The unemployment rate is expected to be unchanged at 3.8%, while month-on-month hourly wages will have grown 0.3%, the same as March.
Other U.S. economic data due on Friday include the S&P Global U.S. services PMI for April at 9:45 a.m. and the ISM services PMI report for April at 10 a.m.
Treasury Secretary Janet Yellen will argue in a Friday speech that democracy is under threat and that undercutting it will, in turn, threaten economic growth.
Fed officials are now out of purdah and so Chicago Fed President Austan Goolsbee will appear on Bloomberg TV at 10:30 a.m. and make a speech at 7:45 p.m. New York Fed President John Williams will deliver comments at 8:15 p.m.
Companies reporting earnings before Friday's opening bell include Cheniere Energy $(LNG)$, Hershey $(HSY)$, XPO $(XPO)$, Fluor $(FLR)$ and Cboe Global Markets $(CBOE)$.
Shares of Amgen $(AMGN)$ are jumping 14% in premarket trading after encouraging data on weight-loss drug, while Cloudflare stock $(NET)$ is down 14% after revenue outlook disappoints investors.
The annual meeting of Warren Buffett's Berkshire Hathaway $(BRK.B)$ will start on Saturday in Omaha. Ahead of that, planned Buffett successor Greg Abel got a vote of confidence.
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Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name AAPL Apple TSLA Tesla NVDA Nvidia GME GME NIO Nio AMZN Amazon.com JAGX Jaguar Health COIN Coinbase Global SMCI Super Micro Computer AMC AMC Entertainment
The chart
Michael Hartnett at Bank of America provides the chart below to show just how badly U.S. regional bank stocks KRE have been performing relative to their big brethren BKX. Does this mean the "pain trade" for the sector would be a bounce in regionals this summer, he ponders.
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-Jamie Chisholm
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May 03, 2024 06:34 ET (10:34 GMT)
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