By Abhishek Vishnoi
(Bloomberg) — Investors should consider hedging the rally
in the S&P 500 for recession-related risks, say Goldman Sachs
Group Inc. strategists, citing several equity indicators.
Bullish option positions look crowded, the rally has been
narrow, valuations remain high, overly optimistic growth
expectations are being priced in and overall investor posture
isn’t light anymore, strategists including Cormac Conners and
David J Kostin wrote in a note dated June 20.
“We prefer to maintain upside exposure to equity while
utilizing the options market to hedge the potential 23% downside
in a recession scenario,” they wrote. There’s a one in four
chance of recession over the next 12 months and if that prospect
become more likely, the S&P 500 could decline to 3,400, they
added.
Kostin, Goldman’s chief US equity strategist, said in
February that European and Asian stocks are better for investors
to buy than US shares this year due to an expected drop in
corporate profits. That call hasn’t panned out so far.
The S&P 500 has outperformed benchmarks in Europe and Asia
this year, entering a bull market in June, despite warnings of a
recession that’s likely to hit next year. Bulls have instead
focused on a pause in interest-rate hikes, while a frenzied
buying of technology stocks tied to an expected boom in
artificial intelligence’s usage has also trumped all macro
concerns over the market.
Some of the Wall Street’s key strategists, including Morgan
Stanley’s Michael Wilson and JPMorgan Chase & Co.’s Marko
Kolanovic, have for months remained wary of the ongoing rally.
Still, the base case of Goldman’s team is for the S&P 500
to rise to 4,500 by the end of this year, implying a gain of
about 2.5% from here on.
Investors should buy an S&P 500 put spread collar — an
options strategy that involves buying a downside put and selling
an upside call — to hedge a long equity portfolio, Goldman
strategists wrote.
–With assistance from Michael Msika.
To contact the reporter on this story:
Abhishek Vishnoi in Singapore at [email protected]
To contact the editors responsible for this story:
Lianting Tu at [email protected]
Namitha Jagadeesh
