The Goldman Sachs Investment Strategy Group’s 90-page report for January 2017 is out, here. it is packed with graphics of GDP and productivity and many other metrics. I don’t understand all of it, and so I went straight to the Key Takeaways at the end of the report, which are listed below (stay invested in US equities, but expect a modest return).
The report does highlight that China is barreling toward a financial crisis, probably in 2018 or 2019. The red line for China in the graph below is already in the high-risk range, and moving up further. ‘An astounding $1.3 trillion of capital has flowed out of China since August 2015’, says the report, and ‘The US now accounts for 20% of the stock of all foreign direct investment. Yet, despite all these major advantages, it did not avert a financial crisis in 2008. It defies logic to assume that China will be the one major country that avoids a financial crisis and a hard landing when it does not enjoy such advantages’.
As we mentioned in last year’s Outlook, forecasting is difficult under the
best of circumstances but particularly so in the last innings of an eight-
year-long economic expansion and bull market. This year brings the
additional challenge of a new president whose policies are likely to follow an
Nevertheless, there are seven key takeaways from our 2017 Outlook:
• Improving growth: We expect global economic activity to accelerate
this year, with modestly higher GDP growth rates in the US, Eurozone,
Japan and many emerging market economies. We expect a small
slowdown in China.
• Low recession risk: Favorable monetary and fiscal policies substantially
reduce the probability of a recession in key developed and emerging
• Still accommodative monetary policy: US monetary conditions will still
be relatively easy because of the slow and steady pace of tightening of
the federal funds rate by the Federal Reserve. At the same time, other
developed central banks are still expanding their balance sheets.
• Remain vigilant: Despite a favorable economic and policy backdrop, there
is no shortage of global risks, including rising populism in Europe, growing
geopolitical tensions, the spread of terrorism and the proliferation of
• China concerns: China is the biggest source of uncertainty given its growing debt burden, accelerating capital outflows and potential for a
notable deterioration in the US-China relationship driven by changing US
trade and foreign policy toward China.
• Stay invested: The collective impact of these various risks is not yet sizable
enough to undermine our core view: that we are in a longer-than-normal
US recovery that supports equity returns, which are likely to exceed those
of cash and bonds. Thus, we recommend staying invested in US equities
with some tactical tilts to US high yield bonds and European equities.
• Modest returns: While we recommend clients remain invested, we
have modest return expectations. We expect that a moderate-risk well-
diversified taxable portfolio will have a return of about 3% in 2017.