- Goldman Sachs (NYSE:GS) still sees opportunities in the equity market following the major stock selloff that has thrown investors for a loop over the past few days.
- The firm notes that the stock decline broke the S&P 500's 404-day stretch without a 5% drawdown, breaking the longest such streak in 90 years.
Following the massive two-day stock meltdown, your first instinct might be to stay far, far away from the equity market.
Goldman Sachs disagrees. It argues that, if anything, the temporary weakness created more investment opportunities — and the firm has narrowed them down to three main areas.
But before we get into their suggestions, let's briefly marvel at just how catastrophic the damage in the stock market was. For one, the Dow Jones Industrial Average saw its biggest single-day point decline in history, while the Cboe Volatility Index (VIX) spiked the most on record.
Further, as of Tuesday's close, the benchmark S&P 500 had fallen 6.2% from a recent high reached on January 26. That snapped the index's 404-day stretch without a 5% drawdown, breaking the longest such streak in 90 years, according to Goldman data.
As for the reason for the selloff, it depends who you ask.
Some market experts attribute the selling to rising correlations between stocks and bonds, leaving "no place to hide" when there's turbulence in one or the other. Others blamed machine-based investing. And some found fault in the short-volatility trade, which blew up in fantastic fashion, taking a pair of wildly popular exchange-traded products with it.
But you're here for Goldman's recommendations. So without further ado, here are the three areas of the stock market the firm finds appealing in a post-selloff world, because of their dislocation from the drivers of this week's madness.
- Cyclicals — "Rising inflation and interest rates should benefit cyclical sectors, such as financials, relative to bond proxies."
- Companies with low labor costs — "Firms with low labor costs will likely be most insulated from accelerating wages, a trend which our economists expect will persist through 2018."
- Note: Goldman maintains a proprietary Low Labor Cost basket, which includes Netflix (NASDAQ:NFLX) and Aflac, among others. This story lays out 14 of the index's stocks.
- Companies with strong balance sheets — "We expect higher interest rates will represent a headwind to firms with weak balance sheets, relative to strong balance sheet stocks, given that leverage is near record levels."