Thoughts on recent market volatility

Since the start of 2022, the S&P 500 index has fallen -8.6% to 4,356 while the 10-year Treasury yield has risen 26 basis points to 1.77%. With a hawkish shift from the Federal Reserve (Fed), a 7% December consumer price index print at four-decade highs, and other global risks, investors are understandably nervous. Yet, even as technical factors exacerbate acute volatility, we believe the fundamental backdrop remains supported by 1) slowing but not slow growth; 2) normalizing but still easy monetary policy; and 3) moderating but positive returns. We will provide additional perspective as market conditions develop.

1) Growth: slowing but not slow

• While global growth may slow this year, we should not equate that with a downturn. In fact, we expect most major economies to experience growth far above trend in 2022.
• We believe the US economy reaccelerates during 1H22 due to medical gains, re-opening, spending surge, and inventory rebuilding, before slowing towards year end. Looking at the equity market, the S&P 500 has delivered a positive one-year total return 87% of the time during expansions going back to 1945.
• Goldman Sachs Global Investment Research (GIR) forecasts US Gross Domestic Product (GDP) growthof 3.4% in 2022, nearly 2x GIR’s estimate of potential GDP of 1.8%.

2) Monetary policy: normalizing but still easy

• We believe the Fed’s well-telegraphed monetary policy can be 1) well-digested by risk assets, even with increased volatility, and 2) helpful in anchoring inflation expectations.
• Real policy rates remain in negative territory. Moreover, the balance sheets of the major central banks are still expected to expand this year, even as some asset purchase programs are being pared back.
• While policy remains fluid, GIR forecasts four rate hikes from the Fed this year, with liftoff beginning in March. In the long-run, GIR sees a terminal rate of 2.5%-2.75%, exceeding that of the last economic cycle.

3) Returns: moderating but positive

• The cyclically-adjusted price-to-earnings ratio currently sits above its 95th historical percentile. While high valuations make markets more susceptible to volatility, they are rarely the catalyst of market drawdowns.
• Equities are mainly at risk when earnings are jeopardized. In the absence of a recession, we see these corrections as technical in nature and often times short lived.
• We believe fundamentals will remain the most important driver of returns this year, and GIR forecasts earnings per share growth of 8% for the S&P 500, 6% for the STOXX 600, 7% for the TOPIX, and 7% for the MSCI Asia-Pacific Ex-Japan.

Source: Goldman Sachs Global Investment Research, Investment Strategy Group, Shiller, National Bureau of Economic Research, Bloomberg, and Goldman Sachs Asset Management. As of January 26, 2022. Past performance does not guarantee future results, which may vary.

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DISCLOSURES

Notes

“Basis points” refers to a unit represented by one hundredth of one percent. “Consumer Price Index” refers to US consumer price index, year-over-year. “Growth” refers to change in gross domestic product, year-over-year. Gross Domestic Product (GDP) is the value of finished goods and services produced within a country's borders over one year. Earnings per share is the portion of a company's profit allocated to each outstanding share of common stock. Bottom Notes: “Pullback” is the peak-to-trough decline during a specific period. The median percent of pullback recovered was calculated on a 3m, 6m, 12m, and 24m basis following equity troughs.

Glossary and Risk Considerations

The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.

The Euro Stoxx 600 Index represents the performance of 600 publicly-traded companies based in one of 18 EU countries.

The TOPIX Index is a free-float adjusted market capitalization-weighted index that is calculated based on all the domestic common stocks listed on the Tokyo Stock Exchange First Section.

The MSCI Asia Pacific ex-Japan Index captures large and mid cap representation across 4 of 5 Developed Markets countries (excluding Japan) and 9 Emerging Markets countries in the Asia Pacific region.

Equity securities are more volatile than fixed income securities and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.

The above are not an exhaustive list of potential risks. There may be additional risks that should be considered before any investment decision.

General Disclosures

Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.

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