The market's in reflation mode. Goldman Sachs says replacing bonds works in times like this.

MW The market's in reflation mode. Goldman Sachs says replacing bonds works in times like this.

By Steve Goldstein

Markets have priced in the strongest reflationary environment in at least 24 years. Here's what Goldman Sachs says worked before

A combination of positive macroeconomic data and the election results have driven one of the largest monthly reflationary shifts across assets since 2000, according to strategists at Goldman Sachs.

They define the reflationary shift by looking at assets tied to global growth versus those tied to monetary-policy changes. The firm also has a reflationary basket of stocks that's up about 7% since the end of September, whose highest weights are Emcor $(EME)$, Uber Technologies $(UBER)$ and United Rentals $(URI)$.

During previous reflationary regimes over the past 20 years, it's paid off to replace the bond component of 60/40 portfolios with alternatives, say strategists led by Andrea Ferrario. They provided a chart with what's worked - trend followers have performed particularly well - as they now say gold and European bonds may work.

"From here, we continue to like allocations to gold, which can be an important geopolitical risk hedge and has other tailwinds from Fed rate cuts and ongoing emerging market central bank buying, and European bonds as diverging macro backdrops and potential trade tariffs should support further UST-Bund spreads widening," they say.

The spread between the 10-year U.S. BX:TMUBMUSD10Y and German government BX:TMBMKDE-10Y bonds has widened by about 30 basis points since the start of October.

Gold (GC00) has backed away from record highs since President Donald Trump won the election.

As for stocks, they say equities should be able to handle rising bond yields as long as the yield rise is driven by better growth. "Rising bond yields might eventually become a speed limit for equities if real yields start to increase (vs. real GDP growth expectations) or if increases in bond yields are too rapid," they say.

The S&P 500 SPX closed last week just shy of 6,000 as it rallied 4.7%, its best weekly gain in a year.

-Steve Goldstein

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November 11, 2024 06:43 ET (11:43 GMT)

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