A month after a sharp sell-off, Goldman Sachs data shows that buying the US stock market is usually profitable. The median three-month return after a 5% sell-off in the S&P 500 from recent highs is 6 per cent since 1980, according to data from the Goldman Sachs equity strategy team led by David Kostin, which has fallen 8.5 per cent from its recent high in July.
David Kostin, in a note, said that a 10 per cent sell-off was often an attractive buying opportunity, although tracking records show that the rebound is not as strong as the small sell-off. The bank’s research shows that the return is positive in 84 per cent of cases after a 5 per cent sell-off.
The global markets recovered from their rout on Tuesday, with some of the hardest hit indices rebounding from the sell-off that was driven by fears of an economic recession and an extreme valuation of the US economy and technology.
Mr Kostin and his team did not offer recommendations based on the analysis but warned that the outlook for the benchmark indices after a 10 per cent sell-off was “significantly different” from what was seen in the preceding market corrections. They pointed out that cyclical stocks sensitive to the economy had underperformed defensive stocks in the recent market sell-off but that the US stock market had not yet priced in an economic contraction.
In another note, Goldman strategists including Peter Oppenheimer said they expected further declines in global markets but did not expect a bear market. At the same time, Citigroup strategist Beata Manthey said that the economic recession scenario was not reflected in prices and that the bank’s so-called bear market checklist — measuring equity valuations, yield curves, investor sentiment and profitability — suggested “buying the dip”, but she said that “once we see more definitive signs of a liquidation, we will feel more comfortable doing so”.