The best 60/40 portfolio hedge

Global shipping faces rising risks. # # --------------------------------------------------------------- The key takeaways today: - The Federal Reserve's rate cuts are coming soon - Risks to maritime trade are growing... - ...but for now, US supply chains are mostly unimpeded - A surprising asset could be the best 60/40 portfolio hedge - David Solomon, Goldman Sachs' CEO, on the resilience of the US economy - Briefings Brainteaser: The wage increases announced by Japan's largest employers Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Fed rate cuts are coming soon After plummeting through most of 2023, US core inflation has rebounded recently (on a sequential basis). With new data in hand, Goldman Sachs Research raised its forecast for core PCE for the fourth quarter of 2024 back to 2.4%, roughly where it stood last fall, [writes Jan Hatzius, Goldman Sachs' Chief Economist, in the team's report](. Our economists also shaved their forecast for Federal Reserve rate cuts this year from four to three. Even so, Goldman Sachs Research forecasts that the US economy is still poised for a soft landing — meaning a return to 2% inflation without a recession. Recent growth and employment numbers have reinforced our economists' view that the supply-demand imbalances in the economy are abating. Favorable weather is part of the reason for February's strong jobs report, and the January figures were revised lower. A slowdown in wage growth suggests that the recent rebound in services inflation is likely to reverse. An immigration surge is a key reason Goldman Sachs Research expects the labor market to rebalance smoothly, despite strong GDP growth and rapid payroll gains. Our economists estimate that net immigration last year was about 1.5 million people above the long-term trend. The surge in immigration is expected to increase US GDP growth and helps explain the recent rise in the unemployment rate (from 3.4% in April 2023 to 3.9% in February 2024). Goldman Sachs Research expects the Fed — as well as the European Central Bank, the Bank of England, and the Bank of Canada — to begin cutting rates in June. The Bank of Japan, meanwhile, decided this week to end its negative interest rate policy and other exceptional policy measures. Even so, our economists' long-term view on BOJ policy remains dovish. They point out that real GDP contracted in the second half of 2023 and the tracking estimate for first-quarter growth is “marginally negative.” For more on how investors are reacting to this week's central bank decisions, listen to [Goldman Sachs Exchanges: The Markets](. --------------------------------------------------------------- Rising maritime risks threaten global trade Maritime shipping — the planet's more important means of trade — has become more fraught and undersea infrastructure more vulnerable amid numerous geopolitical and climate-related developments, experts say in Goldman Sachs Research's latest [Top of Mind report](. “I've been looking at this for close to 45 years and I have never seen a higher level of maritime risk,” says Admiral James Stavridis, a retired four-star US naval officer and former Supreme Allied Commander of NATO. He attributes the rising risks to the return of great power competition between the West, Russia, and now China. Critical undersea infrastructure — such as the 500 undersea cables that the internet runs on — is also under threat, he adds. However, a global maritime coalition could emerge to protect vital undersea infrastructure and free transit on the high seas more broadly, Stavridis notes on the [Goldman Sachs Exchanges podcast](. For now, the increased risks are having a limited impact on global commerce. Tobias Meyer, CEO of the logistics company DHL Group, says excess capacity is dampening the impact of shipping disruptions today (unlike during the pandemic). But the use of longer routes is adding significant time and cost to maritime transit. “Even though the extended voyage around the Cape of Good Hope requires several percentage points of global capacity, and global supply is absorbed in that, this overall demand supply balance is relaxed enough to absorb that,” Meyer says. --------------------------------------------------------------- US supply chains are mostly fine now In earnings calls from the fourth quarter of 2023, fewer firms discussed supply chains than at the peak of congestion in late 2021 and 2022. Mentions of supply chains on the calls remained elevated relative to pre-pandemic levels, but much of the commentary centered around how companies have improved supply chains following pandemic-era bottlenecks. This tracks Goldman Sachs' Supply Chain Bottleneck Index, which registers well below peak congestion levels. --------------------------------------------------------------- An unexpected asset could now be the best 60/40 portfolio hedge The US dollar could be a good addition to 60/40 portfolios for investors nervous about the risk of stocks and bonds falling in tandem, [says Christian Mueller-Glissmann of Goldman Sachs Research](. Mueller-Glissmann, head of asset allocation research within portfolio strategy, points out that the correlation between stocks and bonds has risen substantially since the pandemic. “This means holding a 60/40 portfolio has gotten more risky, because bonds are less likely to buffer equities when they fall,” he explains. Equity / bond correlations have started to decline recently, after inflation started normalizing last year. But sticky inflation remains a risk, and would likely cause the Federal Reserve to hold off on significant rates cuts. “That would be bad news for bonds, of course, but it could also weigh on economic growth and equity valuations eventually,” Mueller-Glissmann says. “That's not our base case, but it's definitely something multi-asset investors are worried about.” One good hedge in this situation would be the US dollar, he says. The dollar would benefit from persistently high US rates, and its safe-haven status means it could do well in the case of a global economic slowdown. In addition, it might benefit from rising uncertainty around US elections. --------------------------------------------------------------- CEO David Solomon: The US economy has proven resilient In [his letter to shareholders]( David Solomon, Goldman Sachs' Chairman and CEO, shares several key themes that have emerged from his conversations with clients. “After years of easy monetary policy and fiscal stimulus, economic conditions tightened at the fastest rate in 40 years, and yet there was not a recession,” he writes. “The US economy has proven more resilient than expected.” Markets are now predicting rate cuts. While inflation may prove stickier than many anticipate, the Federal Reserve has scope to ease rates if the economy declines. CEOs of large multinational companies are focused on the structural dynamics shaping the worldwide economy — particularly inflation, geopolitics, and generative AI. The latter has the potential to disrupt a wide range of industries. But Solomon expects adoption rates to lag the rapid pace of innovation, and many important use cases are in their early stages. A lot of work is needed in data security, regulatory frameworks, and ethical considerations for the technology to reach its full potential. That said, if the capabilities continue to grow and enterprise-safe architectures continue to emerge, Solomon believes the number of use cases will expand significantly. “Never far from our minds is geopolitics, particularly the three flashpoints of Ukraine, the Middle East, and China,” Solomon writes. “Looking at China specifically, CEOs are debating whether and how to shift their supply chains, though China's economy and the US's will continue to be significantly intertwined.” As for Goldman Sachs: “Our focus is on strengthening the firm by providing world-class solutions for our clients as well as investing in our culture and our people,” Solomon writes. “The changing environment and our streamlined strategy are ushering in a new chapter for the firm.” Read the rest of the [letter to shareholders]( and the [2023 annual report]( from Goldman Sachs. --------------------------------------------------------------- Briefings Brainteaser: Spring blossoms Japan's largest employers recently announced record increases in pay. Initial wage increases from this spring's shunto — talks held between unions and management to set monthly pay before the start of Japan's fiscal year — are well above last year's final figure of 2.1%. How much has base pay risen in this year's shunto (as of March 15)? A) 2.5% B) 3.7% C) 4.7% D) 5.9% [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will redirected to external websites that Goldman Sachs does not own or operate. Goldman Sachs is not responsible for the products, services, or content provided on those sites. Please refer to each external website's terms, privacy and security policies for details. [CNBC]( March 18 Infrastructure is the most exciting story in private markets, says Goldman Sachs' Elizabeth Burton (5:21) --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The opinions and views expressed in this newsletter may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. The information provided in this newsletter is for informational purposes only and does not constitute a recommendation from any Goldman Sachs entity to the recipient. Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this newsletter or to its recipient. Certain information contained in this program constitutes “forward-looking statements,” and there is no guarantee that these results will be achieved. 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