On Wall Street, there are forecasts...and then there are forecasts that investors/readers ignore only at their peril. Put investment banking giant Goldman Sachs decidedly in the later category.
On Wednesday, Goldman Sachs (NYSE: GS) said the U.S economy is probably slipping into a recession, and also predicted that the U.S. Federal Reserve will cut its benchmark interest rate, the Fed funds rate, substantially, to 2.5% from 4.25% by third quarter, Bloomberg News reported.
Goldman, which projects an anemic 0.8% growth rate for the U.S. economy for all of 2008, also said it expects the Fed to lower its key interest rate to 3% by the middle of 2008, Bloomberg News reported.
To counteract the effects of the housing's sector's correction and other drags on the U.S. economy, including high energy prices, the Fed has cut benchmark interest rates three times since September.. The Fed Funds rate, the rate banks charge each other, now stands at 4.25%, and the discount rate, the rate the Fed charges banks for short-term loans, is at 4.50%. The Fed also set up a special term auction facility to help banks maintain short-term liquidity.
Analyst C. Leonard Bauer, formerly of Prudential, told BloggingStocks Wednesday, the Goldman Sachs forecast is in-line with Wall Street's overall defensive tone for stocks in 2008.
"Goldman's announcement is in-line with other forecasts, but Goldman's report will reinforce the thesis that the defensive days are here for several quarters. In this environment, the obvious plays are consumer staples, drug stocks, and some health care stocks, in my interpretation," Bauer said. "I'd also raise the quality corporate bond component of a portfolio, with the bond percentage varying, depending on your risk tolerance. It looks like 2008 is going to be a very challenging year for stocks, and I'd like to call it a stock pickers market, but it's not even that. It's a market for isolated stocks in defensive sectors, only."
Further, Bauer, while underscoring that he's "not a Federal Reserve or interest rate analyst," also said he doesn't expect the Fed to lower interest rates as assertively as Goldman forecast.
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Reader Comments (Page 1 of 1)
1-09-2008 @ 2:19PM
David Huston said...
My guess is that Goldman (as was the case with CDO's and the like last year) is broadly shorting the market in advance of its recession call. While that wouldn't necessarily mean that Goldman is acting improperly, it would, if true, highlight the inherent conflicts that exist in companies that make and benefit from higher and lower markets.