Goldman Says Time to Think About a Shift in Market Leadership

Investors should be “open-minded” about a possible shift in leadership across global markets in the months ahead, which could favor a cyclical rotation in stocks and a steeper yield curve, according to Goldman Sachs Group Inc.

The increased probability of an approved vaccine by the end of November is underpriced by equity markets and by that time the result of the U.S. election will be known, wrote strategists including Kamakshya Trivedi in a note Wednesday. Investors will also know how the start of the school year will have impacted the spread of the coronavirus, they said.

“A vaccine approval could also challenge market assumptions both about cyclicality and about eternally negative real rates, and prompt the kind of rotation that started and petered out in May and early June, supporting traditional cyclicals, steeper curves and banks, and challenging tech leadership,” the team wrote. If this happened with a change in the U.S. administration, it “may open up scope for rotation into EM equities if trade policy risks diminish while U.S. tax risks rise.”

While the strategists suggested it may be too early for investors to position themselves aggressively for such a shift, they recommended options trades as a way to play the theme. For example, some call options on the S&P 500 still look attractive, and Goldman sees upside to around the 3,700 level should there be an early vaccine. That compares with a potential downside target of 2,200 should there be a significant reversal of activity from a second wave of the virus, the strategists added.

The team was more forthright on keeping its bearish view on the dollar.

“The range of outcomes is wide and our highest confidence is still in ongoing U.S. dollar weakness,” they said.

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