Nervous investors are bracing for a dramatic slowdown in America’s roaring economy.
Yes, economic and profit growth are likely to lose steam over the next year. But the US economy still looks healthy. Economists don’t foresee an imminent recession.
“The sell-off appears to have overshot the fundamentals,” Goldman Sachs chief US equity strategist David Kostin wrote to clients after Friday’s closing bell.
Investors appeared to agree with that thinking, with the Dow soaring as much as 352 points on Monday morning. But the rally eventually crumbled and the index was down about 300 points late in the day.
The recent market mayhem was swift. Despite Monday’s rebound, the Nasdaq is down a stunning 13% in October. If that loss holds, it would be the Nasdaq’s worst since November 2008. Highflying stocks are down much more. Amazon (AMZN) and Netflix (NFLX) have each plunged about 24% in October.
The foundation for the October market scare was laid in September. Investors became too euphoric about growth, driving valuations up to unsustainable levels.
The sudden spike in Treasury yields forced the markets to quickly adjust. Worries about trade wars and disappointing earnings added further pressure to stocks. The Fear & Greed Index, a CNN Business gauge of market sentiment, flipped from “greed” in September to “extreme fear.”
Even though some economic and earnings reports have fanned the fears of a sharp slowdown, Goldman Sachs expects “positive” economic data to continue. The firm predicts the S&P 500 will recover to 2,850 by year end, representing a significant rebound of 7% from Friday’s close.
“We believe the market has moved past fair value,” Kostin wrote.
In other words, the pendulum swung too far into pessimism.
Rather than a sharp economic slowdown, Goldman Sachs economists are calling for “gradually decelerating” US GDP growth fro