Investment Strategy Group (ISG) 2023 Outlook, Caution: Heavy Fog

By Investment Strategy Group

While investors are facing a period of heightened uncertainty after a tumultuous 2022, the Investment Strategy Group (Asset & Wealth Management at Goldman Sachs) believe that their two primary investment themes remain valid: Staying Invested and US Preeminence.

Key Takeaways


Stay Invested

Staying invested in such an uncertain environment is ISG’s recommended course of action for their clients. The framework for staying invested is best captured by the exhibit below. If the equity market has already discounted a recession, history has repeatedly shown that investors are better off staying the course given forward returns have typically been attractive. During past equity drawdowns, it has taken 10 months on average for moderate-risk portfolios to recover. The risk of missing out on an increase in equities is far greater than a short-term mark-to-market risk that will eventually dissipate. It is worth noting that the recommendation for clients to stay invested would change if ISG develops high conviction that a recession is imminent and not already discounted by the market. Currently, ISG does not have high conviction that a recession is imminent and one has already been partially discounted by the equity market decline.

Exhibit 34: ISG Decision Matrix for Underweighting Equities


US Preeminence

ISG’s recommendation to stay invested is also driven by the general upward trend of US equities. Historically, US equities have been driven by earnings in the US economy, which are upward-trending except for recessions. Downdrafts pass and portfolios recover. US equities, in fact, have historically been the most effective hedge against inflation relative to other asset classes. This asset class has had the highest frequency of outperforming inflation over any period between one and 20 years. US Preeminence drives an overweight to US assets in ISG’s strategic asset allocation process. Their analysis shows that the US ranks highly compared to other regions across most metrics that underpin economic growth, earnings growth and greater resilience.

Below-Trend Growth

ISG expects global economic growth to slow to below-trend levels, with the US having modest growth; the Eurozone, UK and Russia in recession; and Japan an exception with above-trend growth. ISG expects large emerging market countries will grow below trend at mid-single-digit growth levels. For China's post-COVID recovery, ISG estimates growth will reach 4.9%, just above trend levels of 4-4.5%.

Monetary Policy Tightening

ISG believes that most major central banks will continue tightening monetary policy but at a more modest pace than in 2022. China is expected to be a key exception, as leadership tries to stem declines in the property sector.

Significant Geopolitical Risks

There is a much longer litany of geopolitical risks foreseen in 2023 than in 2022. These risks include an escalation of the Russia-Ukraine war, high US­-China tensions, more ballistic missile testing by North Korea, a growing partnership between Iran and Russia, continued nuclear enrichment in Iran and debt ceiling negotiations in the US.

Recession Risk in the US

ISG has assigned a 45-55% range to the risk of recession in 2023. ISG believes the fog of uncertainty is too great to have much conviction on the direction of the US economy, and therefore recommends investors position their portfolios neither for the certainty of recession nor for the certainty of modest growth in the US.

Strategic Asset Allocation in the Face of Uncertainty

ISG continues to recommend appropriate, customized diversification for client portfolios. A mixture of stocks and bonds is an effective starting point for a portfolio, with nearly a hundred years of data demonstrating that the 60/40 portfolio has generated positive returns 80% of the time on a rolling 12-month basis.

Attractive High-Single-Digit Portfolio Returns

ISG expects high-single-digit returns on a well-diversified moderate-risk portfolio. The returns are driven by equity returns of over 10% in developed markets and 9% in emerging markets. ISG expects mid-single-digit returns in fixed income assets.

For more of ISG’s view on the global economic and financial markets, read their 2023 Outlook, Caution: Heavy Fog.

If the Outlook sparks any questions about your personal situation, connect with your Goldman Sachs advisor. Don’t have a Goldman Sachs advisor? Contact us.


United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser, an affiliate of Goldman Sachs & Co. LLC (“GS&Co.”), and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization. Advisory services are offered through United Capital Financial Advisers, LLC and brokerage services are offered through GS&Co., member FINRA/SIPC. How we are compensated by you may change over time and will depend on various factors. Please ask questions and refer to GS PFM’s publicly available Form ADV where applicable.

GS PFM makes recommendations based on the specific needs and circumstances of each client. Clients should carefully consider their own investment objectives and never rely on any single chart, graph, or marketing piece to make decisions. Investing involves risk, and investments may lose value. There are no investment strategies that guarantee a profit or protect against loss. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances.

Investment Strategy Group (“ISG”). The Investment Strategy Group, part of the Asset & Wealth Management business (“AWM”) of GS, focuses on asset allocation strategy formation and market analysis for GS Wealth Management. Any information that references ISG, including their model portfolios, represents the views of ISG, is not financial research and is not a product of GS Global Investment Research and may vary significantly from views expressed by individual portfolio management teams within AWM, or other groups at GS.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. The material is based upon information which we consider reliable, but we do not represent that such information is accurate or complete, and it should not be relied upon as such. The information, data, analyses, and opinions contained herein include confidential and proprietary portfolio information of GS PFM, may not be copied or redistributed for noncommercial or personal purpose without GS PFM’s expressed permission.

All names, logos, and slogans identifying GS PFM or GS PFM’s products and services (including, without limitation, HonestConversations®, MoneyMind®, FinLife®, Financial Control Scorecard®, Live Richly℠, We Help You Live Richly℠, Helping People Live Richly®, One Best Financial Life®, Ideal Life Index®, GuideCenter®, InvestmentViewfinder℠, GS PFM Financial Life Management®, and Financial Years of Freedom℠) are trademarks and service marks or registered trademarks and service marks of GS PFM or its affiliates in the United States and/or other countries.

In July 2019, Goldman Sachs acquired United Capital Financial Advisers, LLC (“United Capital”). Not all services, products, tools and practices described apply or are available to all clients. Products and services obtained by United Capital clients prior to the Goldman Sachs acquisition were subject to different standards of review and diligence. Before agreeing to engage in services with GS PFM, you should consult with your advisor about the particular services, products, tools, and practices that will be applied to your relationship with GS PFM.

© 2023 United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management. All Rights Reserved.

Gs logo
ABOUT THE AUTHOR

Investment Strategy Group

United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.

Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.

Ready to start a conversation? We’re here to listen.

Conversation

Tell us about yourself at no cost or obligation.

  • An introduction to an advisor
  • A personal conversation
  • Your questions answered

Confirmation success!

Thank you for your submission.

By submitting this information, you hereby authorize and request that PFM contact you at the number submitted through any direct contact and any automated means, including but not limited to use of an auto-dialer, pre-recorded/artificial voicemail and SMS, and by email to discuss PFM’s products or services and you acknowledge that PFM will use your information as described in its Privacy Policy and Terms of Use. PFM may share your information with other subsidiaries of The Goldman Sachs Group, Inc. and they may also contact you directly through any of the same means listed above.

To withdraw your consent to receive calls or to change your contact preferences, please call us at 1 (800) 796-3315. To stop marketing emails, follow the opt-out instructions in the email received.