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Published On: Sun, Jul 27th, 2014

Goldman Sachs Group report warns of a potential selloff in stocks in the next quarter

Goldman Sachs strategists expect stock prices to fall in the coming months and express concern about a government bonds seloff.

Goldman Sachs strategists expect stock prices to fall in the coming months.

Goldman Sachs Group Inc. warns there can be a minor selloff of global equities and bonds in the next quarter, similar to those last year, though of a smaller scale. Stocks are facing the risk of a retreat due to rising yields. The bank changed its rating on stocks down to neutral and lowered its outlook on corporate credit to underweight. Goldman Sachs also forecasted further rise in government bonds yields.

Last year, there was an 8.8 decrease in the MSCI All-Country World Index in the period May 21 until June 24. In the same period, yields for the 10-year Treasuries spiked from 1.93 percent to approximately 2.54 percent, according to Bloomberg data. Currently the 10-year yield is approximately 2.46 percent. It is expected to soar to 3 percent by the end of 2014 according to Goldman Sachs forecasts.

Strategists expect a rise in bond yields because of the US intensive growth and accelerated inflation. With the anticipated conclusion of bond purchases by the Fed in October 2014, and in view of the strengthening macro outlook, the market would probably become increasingly hawkish regarding the Fed tightening cycle speed, size, and timing.

There was an expansion in the US GDP, by 3.3 percent, in the second quarter, compared to a 2.9 percent contraction in the first one. For the entire 2014, GDP is envisaged to grow by 1.7 percent, and continue with a 3 percent rise for 2015 and for 2016. The Labor Department data indicate that June saw a 0.3 percent increase in the US consumer price index. That is 0.4 percent more compared to the previous month, an indication the economy is not generating much inflation pressure along with growth acceleration.

The advice for investors is to hold fewer government bonds: with US inflation accelerating, yields are expected to rise. Furthermore, in October the Fed is to finalize bond purchases. Yields have remained low, the time window for the expected seloff has shortened, first rate hike expectations have moved forward. Now a large bonds seloff is likely, enough to need adjustment to equities and credits, to prepare for yields rise.

Goldman Sachs long-term outlook is bullish, as on a 12-month basis it is overweightglobal stocks, indicating sustained economic growth can boost the earnings appreciation potential. Stock valuations are overextended, a concern for investors.

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