Clients Not Worried About Debt Ceiling: Goldman Sachs

In their ‘US Weekly Kickstart’ report of October 11, Goldman Sachs analysts David J Kostin, Stuart Kaiser, Amanda Sneider, Ben Snider, Rima Reddy and Aaron Woodside say earnings data could take up the slack from a paucity of macro data due to the government impasse.

Clients essentially unconcerned with the debt ceiling

The analysts report that clients are almost universally sanguine that a solution to the fiscal logjam would be thrashed out at the last minute, and choose to focus instead beyond Washington at the equity markets.

Clients’ attitudes are reflected in the performance of the Goldman Sachs Group Inc (NYSE:GS) ‘Government Austerity Basket’ – stocks whose revenues are dominated by government spending, and which could be adversely affected due to the fisco-political crisis. This basket has outperformed the S&P 500 (INDEXSP:.INX) by more than 450 bp since end of June (10% vs. 5.4%) and by 300 bp since the start of September (6.6% vs. 3.6%) – proof enough that the market has essentially sidelined the crisis.

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That said, it cannot be ignored that the shutdown is likely to soon affect the flow of critical macro data such as inventories, payroll, inflation, retail sales, trade and factory orders. In the words of the analysts, “this vacuum in macro data should raise the signal value of company-level information.” This should give investors some concern about the economy/markets, but for whatever reason/s they are ignoring a potential default.

Q3 earnings releases for S&P 500

Accordingly, companies’ reports along with management discussions could be the main guideposts for assessing business trends and near term prospects going up to early 2014.

Here is the earnings calendar for the next week:

s&p 500 earnings-calendar

s&p 500 earnings-calendar

Focus on cash returning companies instead

Goldman Sachs Group Inc (NYSE:GS) suggest that investors worried about fiscal Doomsday could adopt the strategy of investing in companies that are cash friendly to shareholders, and which regularly pay out dividends and stock buybacks. Goldman’s GSTHCASH basket of 50 stocks with high cash return profiles has yielded 13.3% return over the last year compared to 5.2% for the S&P 500 (INDEXSP:.INX).

s&p 500 cash-return

Goldman Sachs recommended sectors


Goldman Sachs market forecasts