Don't expect that the whip of the stock market waning soon.
This is the message from Goldman Sachs' best equity strategists to customers as corona virus headlines continue to confuse the market.
While strategists don't expect the ugly days to return in March when the economy closed for the first time, they expect stocks to be more volatile than normal in the coming months.
Two important measures show that the volatility remains historically high after the historic crash in March. First the S&P 500The one-month price fluctuation – the so-called realized volatility – is close to 28 and thus above the long-term average of 13.
Likewise the CBOE Volatility Index or VIXwho tracks activity on the options market is close to 33, above the long-term average of 19.
The investing implication of these trends is that equity investors are ready to get less money for their money after yields are adjusted to the risks they take.
"The consensus is that the typical stock will grow 9% over the next 12 months and volatility should remain higher as the year progresses, indicating low risk-adjusted returns over the coming months," said David Kostin, chief strategist for U.S. stocks at Goldman Sachs. Said in a recent note.
Goldman Sachs has preemptively updated its strategy targeting stocks with the highest risk-adjusted returns based on what is known as the Sharpe Ratio. The strategists led by Kostin calculated this by dividing the 12-month consensus-based price target among analysts with the six-month volatility implied by option traders. A higher ratio indicates a more attractive return in relation to risk tolerance and the prevailing volatility.
What makes this strategy even more attractive is that the market-wide Sharpe odds are close to their lowest level in history. Before the strong sell-off of shares on Friday, the S&P had achieved a return of -5% and an annualized realized volatility of 46% with a risk-adjusted return of -0.1 in the 27th percentile since 1950 since the beginning of the year.
Kostin said the high Sharpe Ratio basket had outpaced the S&P 500 by 6 percentage points this year, largely because it held a large number of value stocks.
The basket has outperformed the benchmark since May due to the 441 basis point improvement in economic data and equity performance. The longer-term track record is also promising: The basket has beaten the S&P 500 by an average of 271 basis points in 66% of the half-year periods since 1999, said Kostin.
The freshly balanced shopping basket includes 31 new stocks that are primarily active in the healthcare, media, IT services, aerospace and defense industries.
"The median component in the basket is expected to achieve approximately three times the absolute return on the Median S&P 500 share over the next 12 months (+ 24% vs. + 9%)," said Kostin.
Below are the 11 new additions that Kostin has highlighted because they have the highest Sharpe ratios:
- Edwards Lifesciences (EW)
- Northrop Grumman (NOC)
- Western Digital (WDC)
- Merck (MRK)
- Cigna (CI)
- Ulta Beauty (ULTA)
- Concho resources (CXO)
- Hartford Financial Services (HIG)
- Allstate (EVERYTHING)
- Universal health services (UHS)
- Boston Scientific (BSX)