If you believe the market is a forward looking mechanism — and most investors would agree that it is — then you may want to prepare your portfolios for a sharp slowdown in economic growth later this year and into 2022 as fiscal stimulus wanes.
U.S. economic growth for this year is “peaking,” Goldman Sachs strategists led by Ben Snider warned in a new note on Thursday. Snider said Goldman’s economists predict 10.5% GDP growth for the second quarter, the strongest quarterly growth rate since 1978. The projection is also near the high-end of most economists on Wall Street.
From there, well, it’s all downhill for GDP growth.
Goldman estimates growth in the third and fourth quarters of this year will clock in at 7.5% and 6.5%, respectively. Growth is then seen slowing in each quarter of 2022 — by the fourth quarter Goldman is modeling a mere 1.5% GDP increase.
“Although our economists expect U.S. GDP growth will remain both above trend and above consensus forecasts through the next few quarters, they believe the pace of growth will peak within the next 1-2 months as the tailwinds from fiscal stimulus and economic reopening reach their maximum impact and then begin to fade,” Snider said.
The economic growth peak could have major implications for investor returns, Snider thinks.
Goldman’s research shows decelerating economic growth usually leads to weaker — though still positive — equity returns and greater volatility. Since 1980, the S&P 500 has averaged a monthly return of 0.6% when economic growth was positive but decelerating. That is half the 1.2% average gain when economic growth was positive and accelerating, points out Snider.
“Decelerating economic growth is also typically accompanied by sector rotations within the equity market,’ Snider added. “Cyclical industries tend to lead the market in environments of positive and accelerating economic growth, but as growth peaks and decelerates more defensive industries typically outperform.”