It is getting to be the time of year when everyone is trying to predict next year’s election. A lot of polls show Trump is trailing, which has given Democrats hope and some comfort. However, a new chart published by Goldman Sachs offers a different view. The bank analyzed historical approval ratings against economic data heading into elections and found that when the economy is healthy, that factor outweighs approval rating. Goldman concluded that should the economy stay on decent footing, Trump has a clear path to victory.
FINSUM: This makes a lot of sense to us and we think it offers a more realistic picture than more minutely-focused opinion polls.
You might not think it is the right time for this stock, but Goldman Sachs says you should. The bank has just come out very positive on Ford. The automotive company has far outpaced the S&P 500 this year, but is still down 16% over the last 12 months. Goldman says that Wall Street is not appreciating how significant Ford’s recent restructuring is, as they think it can unlock “billions in trapped value” by lowering costs in the trucks division.
FINSUM: Basically, Goldman says Ford is going to see a big and sustained pop in earnings that no one sees coming. It is a nice, simple thesis and we like it.
The market is overly reliant on a rate cut, say UBS and Goldman Sachs. Both banks think investors are banking too strongly on the Fed cutting rates. The market is currently forecasting three 25 bp rate cuts by the end of the year. Treasury markets have surged, but too far says Goldman. UBS believes “Markets now imply that the Fed will cut rates by around 70 basis points this year and 35 bps next year. We find this excessive … We believe it would take a recession to provoke the magnitude of rate cuts currently being priced by the market, and this remains unlikely in our view”.
FINSUM: We do not believe the Fed will cut rates this sharply unless there is a recession, but maybe that is exactly what markets are expecting (just look at the yield curve).
The stock market is in knots this week. The trade war between the US and China is increasing in intensity even as the two sides negotiate. This morning it hit a new peak as Trump hiked tariffs on $200 bn on Chinese goods. With the trade war looking more likely to continue, Goldman Sachs has recommended what it says are the best stocks for an all-out trade war. The general idea from David Kostin’s team at GS is to buy service firms, which are less exposed to tariffs and have better corporate fundamentals. Here is a list of the companies in Goldman’s selection group: Facebook, Visa, Bank of America, Walt Disney, Home Depot, Netflix, McDonalds.
FINSUM: This is an interesting mix of large and mega caps and we agree with Goldman’s simple, yet compelling thesis.
Investors are currently worried about corporate bonds. On the one hand performance has been pretty good, especially for the riskiest bonds. But therein lays the problem—highly indebted companies have not been punished and there appears to be way too much corporate debt at the moment. This is the Fed’s view and many market participants, but Goldman has shared another—that the amount of corporate debt in the economy is just fine and corporate balance sheets look healthy. The bank says US companies are in an “unusually healthy position this deep into a business cycle expansion”. Goldman notes that companies are spending a smaller share share of their cash flow on interest than they were a decade ago, and that they are earning more than they are spending.
FINSUM: The corporate debt situation is all about perspective. Things look better than in the last crisis, but anyway you slice it, the debt burden looks at least somewhat daunting.