Stock investors have had a great run in recent years, but with cash now offering positive inflation-adjusted returns, it may be wise to dial back on risk, according to Goldman Sachs Group Inc.

“Mixed-asset investors should maintain equity exposure but lift cash allocations,” Goldman strategists led by David Kostin wrote in a Nov. 19 report. “Cash will represent a competitive asset class to stocks for the first time in many years.”

The call reflects the impact of Federal Reserve interest-rate hikes that have sent yields on money-market funds well over 2 per cent -- surpassing the pace of inflation. With the Fed projected to raise its benchmark by another quarter percentage point next month, and further moves looming in 2019, cash may become all the more attractive.

As for stocks, investors should tilt their portfolios toward defensive sectors including utilities, the Goldman strategists wrote. They forecast the S&P 500 will generate “a modest single-digit absolute return” next year as the “robust” profit and economic growth seen in 2018 slows.

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The U.S. stock market, which saw benchmarks hit a record in September, has been engulfed in a tech-sector rout that contributed to an 8 per cent retreat for the S&P 500. Fears of rising regulation, fading demand for iPhones and a turn in the semiconductor business have taken their toll, alongside global trade tensions and rising interest rates. On Monday, the Nasdaq tumbled some 3 per cent, while the S&P 500 slid 1.7 per cent.

Here are some scenarios from the Goldman analysis:

  • The base case, with 50 per cent probability, sees the S&P 500 Index closing this year at 2,850, up from Monday’s close of 2,690.73. It then rises 5 per cent to 3,000 in 2019.
  • The downside case, with 30 per cent odds: the risk of a 2020 recession starts weighing heavily on investors, with the S&P 500 ending 2019 at 2,500.
  • The upside case, at 20 per cent probability: economic growth stays strong for a longer period of time, and the benchmark index closes at 3,400 next year.

--With assistance from Joanna Ossinger