Goldman Sachs’ private wealth management advisers tell the bank’s clients to stay invested primarily in U.S. equities, advice the firm has reiterated annually since the March 2009 market bottom.
“We have had a theme of U.S. preeminence and staying invested — these two investment themes — since the trough of the global financial crisis. So as many people have put forth the view that the global financial crisis, for example, dealt a fatal blow to U.S. preeminence, ‘That the 20th century was that of the U.S., the 21st century belongs to China.’ We took a very strong stand and said, ‘No, that is not the case.’ And the implication of that for our clients is that they should have much higher allocation strategically to U.S. assets that a market-cap-weighted index would suggest, and we’ve reiterated that over the years,” Sharmin Mossavar-Rahmani, CIO and head of the investment strategy group at Goldman Sachs, said on a call this week.
This week, the investment strategy group published its 116-page note titled “U.S. Resilient,” an annual outlook sent to the firm’s wealth management clients. The note shows data comparing the U.S. to China across a broad series of metrics.
“It’s very hard to actually imagine that anybody is going to knock the U.S. off its perch anytime in the near future, and that includes China,” Mossavar-Rahmani said.
In the note, co-authored by Brett Nelson, the group’s head of tactical asset allocation, Goldman pointed out that it’s recommended staying invested in U.S. stocks on 98 separate occasions since March 2009, including when the S&P 500 declined 19.4% between September and December 2018 and more recently during its 33.8% drop between Feb. 19 and March 23 due to the pandemic. The same advice was given during market rallies, too.
Goldman noted that U.S. equities had gained 609%, or 18% annualized, since March 2009, far outpacing developed markets outside the U.S. and emerging markets’ equities. U.S. stocks have also outperformed other assets such as treasuries, high yield securities, gold, oil, and alternative assets such as hedge funds and private equity.
Goldman also argues that those predicting a decline in the U.S.’s preeminence will be “proven wrong.” According to Goldman, U.S. preeminence is underpinned by the strength of its institutions and economy. Goldman wrote that the “resilience of American institutions and democracy is often underappreciated,” pointing to 160 million ballots cast in the 2020 general election during a pandemic. What’s more, the U.S.’s economy is supported by its natural resources, talent, and “vibrant, innovative and efficient private corporate sector.”
To be sure, Goldman emphasizes that the U.S. is not “immune from recessions, equity market downdrafts, policy mistakes, and pandemic shocks, or that it can address such shocks better than other countries.”
“We actually tell clients that the likelihood of, for example, a 5% pullback based on history is 95%, and in fact, if you saw this exhibit just a few years ago before 2017, that number would have been 100. So we’re telling clients that being invested in equities means we’re going to have pullbacks. The probability of a 10% pullback is 75%. And sometimes, when you see some speculation in some sectors, or maybe too much short-term optimism, you’re going to see these kinds of pullbacks. So we do tell clients that they should be expecting something like that,” Mossavar-Rahmani said.
Bitcoin doesn’t belong in the portfolio
Elsewhere, the recent run-up in Bitcoin (BTC-USD) has garnered the firm’s clients’ attention about the cryptocurrency and the role it might play within a portfolio. Goldman said it would not recommend Bitcoin as an investable asset class in a portfolio.
In response to a question from Yahoo Finance, Mossavar-Rahmani outlined some issues with Bitcoin, noting that “something with a long-term volatility of 80% can’t be a medium of exchange.”
“First of all, even the biggest proponents of Bitcoin have now abandoned the theme that Bitcoin is a medium of exchange. So as a currency, will it be used for trading purposes? And the answer is, ‘No.’ They’ve abandoned that. It’s not a medium of exchange even though initially that was the theme,” Mossavar-Rahmani added.
The CIO also said that Bitcoin is “certainly not a unit of value,” challenging its role as a currency. What’s more, its volatility also hinders its store of value argument, she said.
“The question we ask ourselves is, ‘Who assigns that value?’ So, the same way you had that grouping of people liking a particular stock and talking about some of these stocks over the last several weeks and driving up the price, does that make it a real value if something goes up 27-fold as we saw with, for example, GameStop (GME) and then back down 80%. If you think about the amount of money some people made, but also a lot of people lost. Somebody traded GameStop and bought it at $470, for example. So, just everybody piles into an idea and talks it up, doesn’t necessarily mean it’s a store of value,” Mossavar-Rahmani added.
While Bitcoin has a total fixed supply, with a hard-coded total supply of 21 million bitcoins, it could be subject to competition within its space.
“Well, if there’s a particular value that Bitcoin puts forth or that value could be put forth by Ethereum. It could be put forth by all the other cryptocurrencies. There’s nothing unique about it other than everybody saying, ‘It’s scarce, so it will be more valuable.’ But there’s nothing tangible there,” she added.
Mossavar-Rahmani said that investors trying to hedge a portfolio against a big downdraft are better off with U.S. Treasuries, while stocks have historically been a better hedge against inflation.
“If you’re trying to hedge against inflation, history, and again, I realize there wasn’t a Bitcoin at that time, but history shows you that actually equities are the best asset class for store of value,” she said.
She noted that even those who support Bitcoin acknowledge a probability that it could go to zero.
“So even the biggest proponents will say it’s probably at least 10% probability that it goes to zero. Nobody would say that about the S&P in the long run. It can have volatility high to low the global financial crisis, it could be down 60%, but it’s not going to zero on a long-term value basis. And so we actually don’t buy into the argument,” she said.
“We tell clients if they want to speculate on something that could have huge upside because more and more people will talk about it, people will be concerned about investing because of the fear of missing out on something that’s up that much, sure, it can go higher, we tell clients, ‘We don’t know.’ But we don’t think there’s a way of actually knowing is this good value or not good value,” Mossavar-Rahmani said.
Finally, with the incredible amount of electricity used to mine Bitcoin, Mossavar-Rahmani makes a case that “it seems a little bit contrary” for ESG (environmental, sustainability, governance) focused investors.
“So, people could speculate. But it’s not something that we would recommend to clients as an investable asset class in a portfolio,” she said.
To be sure, Goldman likes blockchain technology and thinks it will have many uses. Mossavar-Rahmani’s team also supports the idea of a digital currency.
“The idea of having a digital currency, including whether it’s from the central bank in China, whether it’s in the ECB, or whether it’s the Federal Reserve, having digital currencies can make transactions and global flow of assets much easier. So, we also support the concept of having a digital currency. But it’s the concept of a cryptocurrency,” she said.
Julia La Roche is a correspondent for Yahoo Finance. Follow her on Twitter.