Bear market rally or stock market bottom? 📉

 --------------------------------------------------------------- Hello! It's Thursday, September 15. How high will interest rates go? Has the stock market [hit bottom yet]( Is the[ U.S. dollar too strong?]( Below are some of the top insights from Goldman Sachs on these topics and more. [Take our weekly quiz here](. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- The Market Is Bracing for Higher Interest Rates This week's stronger-than-expected report on U.S. inflation is shaking up investors' expectations for the peak of Federal Reserve rate hikes, which is the so-called terminal rate. Here's what some of our experts across the firm are saying: - Markets are pricing in a hike of 75 basis points this month, with some chance of a 100 basis points increase, compared with 73 basis points before the consumer price index report that was released on Tuesday, according to our Global Markets Division's Marquee platform. - While our economists in Goldman Sachs Research still expect the Fed to hike its funds rate by 75 basis points at next week's policy meeting, they raised their expectations for a December rate increase to 50 basis points from 25 basis points, citing the inflation report's broad-based strength in wages and economically sensitive categories, such as housing, health care and education.  - GS Research now expects the fed funds rate to rise to 4%-4.25% by the end of the year (compared with 3.75%-4% previously). - "We think the Fed is going to guide the market to a period – maybe a very long period – of holding the federal funds rate steady at an above-neutral rate” following Tuesday's CPI report, says GMD's Josh Schiffrin, co-head of U.S. interest rate products and global interest rate products. He thinks that terminal rate is close to 4.5% (or a 4.25% to 4.5% target range). "While the report most likely doesn't change the September decision of 75 basis points, it probably implies a higher destination point for the policy rate and signals increased conviction in the need to keep it there for some time. We think once that destination is reached, holding that policy rate at what the Fed perceives to be a restrictive zone for a long time is the strategy to bring inflation back down to 2%.” - While the drop in stock prices this week was significant, the decline mainly erased the previous market “squeezes” as investors were covering their short trades that bet on equity declines, says GMD's Rob Liberty, who manages Americas high-touch equity sales trading. Institutional investors were mainly on the sidelines. [Find out more insights from GMD here.]( --------------------------------------------------------------- Bear Market Bounce or Stock Market Bottom? 📉 After a summer stock market rally, investors are watching for signs of a stock market bottom. Pinpointing exactly when a market transforms from a bear to a bull can be difficult because bear market rallies are common, says Peter Oppenheimer, Goldman Sachs Research's chief global equity strategist and head of macro research in Europe, on the[ latest episode of Exchanges at Goldman Sachs](. Bear market troughs have common characteristics. Low valuations are a necessary, though not sufficient, condition for a market recovery, Oppenheimer tells host Allison Nathan. “You tend to find that while equity markets do recover while economic conditions are still weak and profits depressed, it's usually not until the rate of deterioration has slowed” that investors really start to price in a recovery, he adds, noting that reaching a peak in inflation, interest rates and bearish sentiment and negative positioning are also important. Are we there yet? Not all of these conditions have been met yet, suggesting markets are in for a bumpy ride, Oppenheimer says. “There was a period of optimism in the summer focused on the Fed pivot and the belief that we were close to a peak in inflation and interest rates,” he says. “But what we've learned from Jackson Hole and since then is that was premature. Central banks have become more hawkish, yet again, both in the U.S. and Europe. So, we think that there's still some way to go to price in higher terminal rates.” Markets could fall further. Oppenheimer expects most equity markets to fall roughly 30% from their peaks. “Some are already close to that. In Europe, for example, we're not too far away from that now. And it's true across some of the emerging markets. We've got further to go in the U.S. And the U.S. has a high valuation. But of course, there's a greater probability of a softer economic landing in the U.S. economy than there is in other markets.” Subscribe wherever you get your podcasts [Spotify]( |  [AppleÂ]( | [ GoogleÂ]( |  [Stitcher]( --------------------------------------------------------------- Is the US Dollar Too Strong? The dollar is on a roll: Even as the American economy shows signs of cooling, the [greenback has soared against major currencies]( from Europe's 19-member euro to the Chinese renminbi. The U.S. currency has rallied in part because the Fed is hiking interest rates more aggressively than some other central banks as it seeks to contain inflation, according to Kamakshya Trivedi, head of global foreign exchange, interest rates and emerging markets strategy research. The dollar, which is seen as a haven during turmoil, has also risen due to growing concerns that the shock in energy prices will cause economic growth in many parts of the world to stall. - The European Central Bank, for example, is also raising rates to contain inflation, “but they have to have half an eye on whether policy tightening generates concerns on sovereign credit and whether it creates [financial fragmentation]( Trivedi says. - The dollar's strength against the U.K. pound, which has fallen to a multi-decade low, has led to speculation about an emerging market-style currency crisis. Trivedi points out that those panics tend to be related to fixed exchange rates and debt that's denominated outside the domestic currency, which is not the case in Britain. The new U.K. administration has explained some of its fiscal policies, which has removed some uncertainty and will give the central bank more scope to move forcefully if needed. “That should put some of these crises-type stories to rest,” he says. - However, there are signs that the dollar's rally is in its “later innings,” Trivedi says. While the U.S. currency probably still has some scope to strengthen, it is also overvalued by some measures and is at extreme levels compared with some important pairs. [Read more about the strong dollar's impact on the U.S. economy here.]( --------------------------------------------------------------- Cliff Asness: The Keys to Success for Quantitative Investors Above (L to R): Goldman Sachs' Sharmin Mossavar-Rahmani and Cliff Asness of AQR Capital. If anyone understands the highs and lows of investing, it's Cliff Asness, the founder, managing principal and chief investment officer of AQR Capital, a quantitative investment strategy firm that has gone from managing $1 billion in assets to $100 billion since the late 1990s. In an episode of [Talks At GS]( he shared insights on financial markets in 2022 and his latest thinking on investing: - On his investment strategy: “We like things that are getting better both in terms of price and fundamentals. We like more profitable things. We like lower beta things. We like higher carry.” - On living through historic events: “Everybody has the arrogance to think they're living through unique times, including me. It's always like, ‘No one's ever experienced this before'…what we've been experiencing for the last 6-12 months is a return towards normalcy. You know, positive interest rates. Spreads between cheap and expensive [are] still very high but not astronomically high. And that involves a lot of pain for some people, but that's not abnormal. What's abnormal is probably the ten years after the GFC [Global Financial Crisis] with very, very cheap money and virtually any [long] strategy doing well without a lot of very bad hiccups.”  - On pursuing a career in financial services: “Be really careful you're not shifting your career to chase the hot thing. I particularly tell this to students in business school…If you love something, just do it and you might be early. But if a big part of why you're doing it is it's the thing everyone wants to be doing now, I think you're going to be three to five years late…I don't believe in doing something you don't like. So, find something that you find interesting that the world needs, and you'll do well.”  [To get all the insights from Cliff Asness, watch the full interview.]( --------------------------------------------------------------- BRIEFINGS Brainteaser: The Plummeting Pound The U.K. pound recently fell and closed at its lowest level against the U.S. dollar in decades. For this week's BRIEFINGS Brainteaser, can you tell us who the U.K. Prime Minister was the last time the British currency was this weak against the greenback? A) Margaret Thatcher B) John Major C) James Callaghan D) Tony Blair [Check the answer here.]( --------------------------------------------------------------- ICYMI: In the Media [BloombergÂ]( September 13 [Goldman sees fresh pain on Wall Street as real rates rise]( [Bloomberg]( September 13 [Goldman Sachs says market sees 50% risk of China stocks exiting US]( (4:56) [Reuters]( September 8 [Goldman Sachs bolsters asset management unit with new adviser]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. Goldman Sachs has no obligation to provide any updates or changes to the data. No investment decisions should be made using this data. To the extent this newsletter includes material from the Goldman Sachs Global Markets Division, please [click here]( for information relating to Global Markets Division material and your reliance on it. To the extent this newsletter includes material from Goldman Sachs Asset Management, please [click here]( for additional disclosures. [Click here]( to unsubscribe. © 2022 Goldman Sachs, All rights reserved. 200 West Street, New York, NY 10282, USA --------------------------------------------------------------- [GS.comÂ]( |  [Careers Blog](  | [Privacy and Security](  | [Terms of Use]( [Twitter](