Brett Nelson, Head of Tactical Asset Allocation at Goldman Sachs Investment Strategy Group, joined Closing Bell's Kristen Scholer to break down recent stock market action, and look ahead at the trends that may materialize this year on Wall Street.

Odds of a 2023 Recession About Even, According to Goldman Sachs

I'm joined by Brett nelson, head of tactical asset allocation at Goldman Sachs Investment Strategy group Brett it's great to have you on the show, not too far from where we are down here on Wall Street? Thank you for joining. And we do have a bit of a mixed reaction in the stock market today. What's your take on the market action? Well, you know, our outlook this year was entitled caution heavy fog and we think that there's a lot of uncertainties obviously that the market is dealing with in terms of the trajectory of US growth for the economy, the path of inflation, what central banks around the world are going to do and of course what's going to happen with geopolitics. But our main takeaway is even though we think that there's probably 50% odds of a recession in the US, So kind of a coin toss, we see more passed to the S and P 500 gaining this year than declining. And that's because at the end of the day, equities are forward looking, they tend to bottom 6 to 9 months before earnings trough. And also we know that if we were to have a soft landing equities probably do pretty well given the very large decline that we had last year. So putting those two pieces together, we're cautiously optimistic but nonetheless acknowledged the tremendous uncertainties that investors space this year. And you know, after Davos, I think that kind of was a theme that was emerging at least here on Wall Street. This theme of cautious optimism. Of course, the president of the new york stock Exchange calling it that as well. From a tactical perspective then, how are you recommending clients position their portfolios? Well, I think in the in an environment as you probably would imagine where you you know, are kind of thinking that there's even odds on a recession. Our general advice to clients is we don't think that they should position themselves exclusively for either a soft landing nor a recession. And our advice therefore, is to have a broadly diversified portfolios with a mix of stocks, bonds and alternatives and stay close to that strategic asset allocation. Because we don't think this is an environment where there you can have a lot conviction and secondly, therefore positioning yourself to one extreme or the other seems to us to not be the highest risk reward view. Obviously we'll get more information as the year progresses and then we would kind of adjust our tactical positioning in response. So what are the key bits of information for our viewers following along that they need to keep an eye on to see how the markets might move in reaction to that, of course, what's basically dictating your own tactical strategy. Yeah, I mean there's no shortage of things to look at this year, but I think the key ones that really the Fed has indicated is, you know, they're kind of comfortable with the idea that goods inflation is coming down and we do expect that to continue this year. And we also know that housing inflation will likely turn lower later this year just given the lags associated with that and we see rental lease terms and whatnot coming down quite aggressively on a month over month basis with a lag that will flow through. But what they seem to really be focused on is this service component that's related to wages. So in other words, now that people are, you know, out partaking of services. Again, the concern is that if wage growth doesn't moderate that will continue to drive services inflation and that's the dreaded wage price spiral. So obviously one of the key things that we're watching is what's happening on the wage front and recently at lee there has been some supportive data that you have seen wages start to moderate the average hourly earnings report in the most recent report was favorable in that regard as well as some of these leading indicators of wages like Goldman has its own monthly wage tracking survey that it does with corporate America which has turned down and then indeed has their own job postings wage tracker that they do and all of those things are pointing toward wages coming down Without a material increase in unemployment so far. And that's kind of the definition of a soft landing. So as long as those pieces continue to play out, I think that's the type of thing which could be a ballast to the marketplace, which as you would know, you know, we have 77% of the global equities now, trading above their 200 day moving average, which is kind of the demarcation line between an uptrend and downtrend and with the S&P. Just poking above the market is certainly leaning in that direction from a price discovery standpoint. What is the best asset allocation bret when it comes to stocks versus bonds? Because I've noticed this year alone, we've had a lot of guests come on and say, look, we're coming up the worst year for bonds. They think bonds look attractive right now, both from a price and yielding standpoint. So how would you recommend investors big moves based on that? Well, it's interesting because last year we had a, you know, a typical 50 50 or 60 40 stock bond portfolio lose money and that's not that rare. I mean, historically that that type of portfolio has declined about 20% of the time, which means it makes a gain in 80% of years, which is pretty good. But what was very rare last year was that you had both stocks and bonds declining at the same time. And that's only happened about 2% of the time. And that's led many people to say, you know what, let's just abandon the idea of a stock bond portfolio and move on to commodities or other alternatives? We lean against that conclusion. Um and we do so on the back of history. So what's interesting is if you look at that rare 2% of the time when both stocks and bonds are down, or just more broadly when a 60-40 portfolio loses money. If you look at the returns in the year and two after that, they're actually above average. So in fact a 60-40 portfolio after those rare years where both were down actually had a return of about 30% over the next two years. So given that, and given the rarity of these, these types of declines, we do not think that clients should be abandoning their kind of basic building blocks of being in both stocks and bonds, especially since those portfolios tend to recover pretty quickly. And our analysis, it was 8 to 10 months after those drawdowns that those portfolios recovered. So again, we're advising clients not to abandon. That is a basic building block of the portfolio, Brett such good insight there. Thanks so much for coming on the show. I hope you'll join again, that's Brett nelson, head of tactical asset allocation of Goldman Sachs Investment Strategy group