Goldman: A Hot January for Stocks Moves into a Cooler Rest of Year

We hope you enjoyed January, because the rest of the year will be so-so. That is Goldman Sachs’ message to clients following the best performance for the year’s first month in three decades.

An unappetizing stew consisting of “a slowdown in earnings growth, higher rates, and tighter financial conditions” should keep stocks from a boffo performance as the rest of 2019 unfolds, Goldman indicated.

“We argued that a modest bounce at some point early in the year was likely, and if investors missed it there would be a risk of missing the bulk of the returns for the year,” the firm’s analysts wrote.

January’s rally was in marked contrast to the late-2018 downturn, when stocks came close to dropping by 20%, which indicates a bear market. The S&P 500 is up about 9% this year. This goes far beyond the typical January Effect, a tendency of stocks to rally as investors buy to replace year-end tax-loss harvesting sales.

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Earnings thus far for last year’s fourth quarter have been better than many feared, although analysts’ estimates are dropping for quarters in the future. FactSet Research projects a year-over-year decline in earnings growth of almost 1% for the first period of 2019. Such a negative turn would be the first decline in more than two years.

At the moment, stocks are buoyed by the Federal Reserve’s seeming pause in hiking short-term interest rates and less-ambitious depletion of its bond holdings, which affect long rates.

But the Fed has left open the possibility of resuming its tightening behavior if, as it’s fond of saying, the data suggests that would be prudent. For once, when Fed Chairman Jerome Powell addressed reporters last month to announce the central bank’s thinking (and not heralding a rate boost), the market didn’t go down.

Goldman indicated that, “while we saw a bounce in equity markets in 2019, we also argued that this would be followed by the resumption of a ‘flat & skinny’ trading range, with relatively low equity returns.” There’s some comfort in that Goldman doesn’t see another downward jolt, such as the one the market endured in December.

There’s a bit of a disconnect between these comments and Goldman’s official forecast, though. Going forward, the firm believes the market will eke out just meager gains. From here until the end of 2019, it expects further increases in the S&P 500, which will be around 10%, close to what the index scored in January.

In other words, if you were out of the market in January, you missed half the uptick.

Tags: Earnings, Goldman Sachs, S&P 500

The Seattle City Employees’ Retirement System (SCERS) and Spokane Employees’ Retirement System are debating proposed legislation that would allow their portfolio governance to be managed by the Washington State Investment Board.

Senate Bill 5240 was introduced on Jan. 16by Democratic Sen. Reuven Carlyle and Republican Sen. John Braun to provide an option to the major retirement systems in Seattle, Tacoma, and Spokane to irrevocably outsource the management of their portfolios to the Washington State Investment Board. Both the Seattle and Spokane boards indicated it was not an option they would pursue.

“SCERS is not seeking the option made available in the bill to outsource investment management,” SCERS Executive Director Jeffrey Davis said in a letter to Carlyle and Braun. “The bill suggests that first-class retirement systems have higher administrative costs and more limited investment opportunities. In fact, SCERS and WSIB have substantially similar costs and access to investment opportunities. The total costs as a percentage of assets under management for 2017 were 0.54% for SCERS and 0.55% for WSIB.”

Philip Tencick, executive director of the Spokane City Employees’ Retirement System, echoed Davis’ sentiments. “We don’t feel it’s necessary,” Tencick told CIO. The “permanent nature of [the bill] makes it something we don’t consider,” he said. “The bill has flawed governance and actually increases risk to the plan if it’s enacted.”

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“Outsourced CIO options are plentiful and solve a similar problem, and do so without the misalignment of risk,” Tencick added.

In addition, SCERS maintained that it would incur substantial transaction costs of at least $25 million from transitioning all of its public and private holdings to the WSIB. The transfer of these assets and management of them “could result in a severe misalignment with its liabilities and tolerance,” the pension said in a report.

The SCERS letter concluded with a request for the legislation to be modified to make it so the decision would have to be jointly agreed upon by the city council, system members, and retirement system board, in contrast to the current version that allows the decision to be made solely by the city council. Tencick agrees with Seattle on this proposition.

Representatives from Carlyle’s office did not respond to questions by press time. Carlyle is the bill’s main sponsor.

SCERS to re-contract with NEPC

In addition to considering the legislation, SCERS also addressed in its January board meeting its general investment consultant position now that its current contract with NEPC is expiring. SCERS investment staff recommended that the pension re-contract with NEPC for an additional five-year period ending June 2025.

“The Board is permitted and has discretion to re-contract with an investment consultant outside of an RFP if it is satisfied with the level of service and quality of advice. Accordingly, staff also suggests that an RFP process be conducted in 2024 directly prior to when the next contract would expire,” the board said.

SCERS 2019 investment plans

At its January meeting, SCERS staff also outlined their 2019 investment plans, a summary of which is below:

Tags: Pension, Philip Tencick, Seattle City Employees’ Retirement System, Spokane Employees’ Retirement System, Washington