And An Even Louder Warning From Goldman: The "Yellen Call" Is Back And Will Limit Further Market Upside
By Tyler Durden
Last November, when the S&P was trading just north of 2000, Goldman’s Charles Himmelbrg revealed his first tactically bearish reason (even as the overall firm was rolling out a se to Top 6 bullish Trades 5 out of which were stopped out at a loss just months into the new year) why stocks are unlikely to go much higher. He dubbed it the “Yellen Call“, which was effectively an argument that US risk rallies will be “self-limiting” as a result of Fed intervention, and explained it as follows:
US equity upside: Limited by the ‘Yellen call’
We see limited upside to equities in 2016. Our US Portfolio Strategy team has a 2016 price target of 2,100 for the S&P 500, suggesting a very modest return of 5% (from current levels). Their framework assumes that 1) earnings per share will rise 10.1%, driven partly by ‘base effects’ in the energy sector and partly by improvements in global growth more generally, but that 2) the price-earnings multiple will fall approximately 5% (to 16.3x from 17.1x), as typically happens during rate-hike cycles. And, due to the delayed timing of rate hikes, the downside risk to price-earnings multiples is probably greater this year because the positive growth surprises that would normally accompany rate hikes are arguably behind us. Since our US GDP forecast envisions mild deceleration in 2016, equities and other risky assets will likely bear the brunt of rate hikes without the usual buffer of better growth data.
We also see a risk that the ‘Bernanke put’ will gradually be replaced by the ‘Yellen call’. The ‘Bernanke put’ captured the intuition that when the risks to growth, inflation and market sentiment are skewed to the downside and the Fed has an easing bias, monetary policy reacts aggressively to bad news. Now that these risks have receded, we expect the Fed will shift to an easing bias, implying that monetary policy will likely begin to react more aggressively to good news. The inflection point for this shift to an easing bias will arguably arrive in 2016, beyond which rallies in risk sentiment may be met by less accommodative monetary policy – the ‘Yellen call’.
It didn’t take long for Goldman to admit it had been wrong about the “Yellen Call” – all it took was the market swoon of January and February for the Yellen Fed to revert back to a “Bernanke Put” baseline.
Our notion of the ‘Yellen call’ was the converse of this – that with labor markets approaching full employment and core PCE inflation rising towards target, meaningful rallies in market sentiment would likely be met with a more robust withdrawal of policy accommodation. And this, logically, would tend to buffer or ‘cap’ the upside potential for risky assets. It hasn’t happened. Market conditions have been considerably more volatile and uncertain than we expected over the first quarter. While we correctly anticipated the downside risk to oil prices and cautioned that this would likely weigh on credit spreads (#4 of …read more
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