GOLDMAN SACHS: 2 big reasons the stock market is safe from a correction

pulse

September 11, 2017 1:57 PM

Goldman Sachs provides two big reasons the stock market is safe from a 10% correction, at least for the time being.

Clients of Goldman Sachs can't stop asking about the possibility of a major stock market downturn.

And can you really blame them for worrying? After all, it's been 14 months since the S&P 500 has seen a 5% sell-off and 19 months since a full-blown 10% correction.

Still, Goldman says fear not, for a couple of key factors are still working in favor of a prolonged stock market expansion.

The first is a lack of investor euphoria — the type of unabashed confidence that has historically left bull markets vulnerable to sharp downturns. Goldman cites cash positions of 3.2% for mutual funds, which is in line with the historical average. If there were an overabundance of confidence, this measure would be far lower, with more capital in play.

"Investors today are situated between skepticism and optimism," a group of Goldman strategists led by David Kostin wrote in a client note. "Few are euphoric as 27% of core managers are beating their benchmark. 'Tormented bulls' best describes investor mentality."

A second factor that should keep the stock market afloat is persistent US economic expansion, Goldman says. The firm specifically cites strong monthly job growth, rising wages, confidence at its highest level since 2001, and household balance sheets that are their strongest since 1980.

Further, both sales and earnings growth for US corporations are headed for more growth in 2018, while companies clearly don't view their shares as overvalued, as indicated by their continued willingness to repurchase shares, Goldman says.

Overall, the firm argues that investors would be wise to keep these positive drivers in mind as they watch the stock bull market continue into its ninth year. Instead of worrying about the rally dying of old age, traders should be focused on actual fundamental drivers.

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