Goldman Stacks Bets on Stocks, Not Bonds

Goldman Sachs (NYSE:GS) touted the long-term return of equities on Wednesday, saying stocks are significantly better positioned than bonds for growth.

The report by Goldman analysts Peter Oppenheimer and Matthieu Walterspiler comes as bond yields, which move in the opposite direction of prices, continue to reach new recent highs. The benchmark 10-year Treasury bond hit a fresh five-month high this week as investor risk appetite continued to rebound.

It also comes amid mounting stock values, a reflection of the improving economy that has led investors to reshuffle their portfolios into riskier equities from safer bonds.

Investors often store cash in safe, low-yielding bonds when the economy turns sour, but will quickly snatch up their money and invest in money-making equities as the market rebounds.

"Given current valuations, we think it is time to say a 'long good bye' to bonds, and embrace the 'long good buy' for equities as we expect them to embark on an upward trend over the next few years," the analysts wrote in a report titled "Global Strategy Paper" dated Wednesday, according to The Wall Street Journal.

That view is positive for the stock market, particularly since the Dow has already climbed 7.8% so far this year and the S&P 500 has grown a sizable 11.76%, but could prove sour for the bond market.

As investors move into stocks, bonds become less attractive, leading to the rise in rates. Some fear that could ultimately hurt the economy by making credit, including rates attached to mortgages, more expensive.

Yet, Goldman said tighter credit, investment spending and demographic trends on equities valuations are “overstated.” After all, mortgage rates remain near their lowest levels in decades.

“I think you see a trend in place that is sustainable [and] has the potential to reward equity holders with dividends, in many cases better than the yields on bonds,” said Peter Kenny, managing director at Knight Capital Group.

Goldman noted stocks are risky and won’t always bring robust returns, particularly since future earnings may be weaker than in the past, however it stood by its view on equities, saying there are reasons to believe they are better than the markets are pricing.

Kenny said stocks will improve over the long term, though not always in a straight line as the economy climbs out of a hole from three years ago. Pullback is likely at some point, probably in the second quarter, he said.

“Even if you buy into the idea that a double dip is out there in the offing, it’s the depth of the double dip, the severity of an economic contraction,” Kenny said. “If we do get a pullback it’ll be minor.”

Goldman pointed to technology and compensation control, among others, as factors that may prevent corporate margins from falling. Kenny pointed to support for corporate earnings, an improving domestic economy and other data that speak to sustained growth.