U.S. Economic Growth Is Peaking And That Means Stocks Could Struggle This Year, Goldman Warns

As the economic benefits of massive fiscal stimulus and businesses reopening reach their peak in the coming weeks, Goldman Sachs analysts are warning that U.S. economic growth will slow, leading to “paltry” stock returns over the next year and an end to the market’s massive pandemic rally.

U.S. economic growth will peak within the next two months, Goldman analysts said in a Thursday morning note, forecasting that gross domestic product will grow by an annualized 10.5% rate in the second quarter, the strongest expansion since 1978 aside from the economy’s stark mid-pandemic rebound in the third quarter of last year.

Economic growth will then “slow modestly” in the third quarter and continue to decelerate over the next several quarters, the analysts predicted, adding that such deceleration is typically associated with weaker stock returns and higher market volatility.

In a sign that fiscal stimulus effects and economic activity are peaking, the ISM Manufacturing index, a monthly economic indicator measuring industrial activity, registered at 65 in March—above the threshold of 60 that Goldman says typically represents peak economic growth.

Coming off the worst quarter in history, the U.S. economy grew at its fastest pace ever in the third quarter as a nation battered by an unprecedented pandemic put itself back together. Michelle Girard, chief U.S. economist at NatWest Markets, Stephanie Kelton, professor of economics and public policy at Stony Brook University, and Michael Strain, director of economic policy studies at the American Enterprise Institute, join “Squawk Box” to discuss. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi » Subscribe to CNBC TV: https://cnb.cx/SubscribeCNBCtelevision » Subscribe to CNBC: https://cnb.cx/SubscribeCNBC » Subscribe to CNBC Classic: https://cnb.cx/SubscribeCNBCclassic
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According to Goldman, the S&P 500 has historically fallen an average of 1% in the month after the ISM Manufacturing index registers more than 60, and in the subsequent 12 months, it’s gained a “paltry” 3%—significantly less than the 14% annualized return over the last 10 years.

Goldman expects the S&P will end the year at 4,300 points—implying just a 4% increase from Thursday’s close, lower than some other market forecasters who expect the index could soar to as high as 5,000 points by year’s end.

Crucial Quote

“Equities often struggle in the short term when a strong rate of economic growth begins to slow,” a group of Goldman strategists led by Ben Snider said Thursday, noting that during the last 40 years. “It is not a coincidence that ISM readings have rarely exceeded 60 during the last few decades; investors buying U.S equities at those times were buying stocks at around the same time as strong economic growth was peaking—and starting to decelerate.”

Surprising Fact

The most recent ISM reading is the highest since a level of 70 in December 1983—after which the S&P inched up just 0.2% in the following 12 months.

Key Background

Trillions of dollars in unprecedented fiscal stimulus during the pandemic have helped lift the stock market to new highs over the past year, and though President Joe Biden’s $2.3 trillion infrastructure plan could add even more fuel to the economy, Anu Gaggar, a senior investment analyst for Commonwealth Financial Network, said Thursday that “investors have been quick to recognize [that] much of the upside has already been priced.”

That’s evidenced by the growing divergence in performance between the broader market and growth stocks this year, Gaggar says, echoing the sentiment from Goldman analysts Thursday. The tech-heavy Nasdaq, which far outperformed the broader market by surging 44% last year, has climbed about 9% this year, underperforming the S&P and Dow Jones Industrial Average, which are up roughly 12% each.

Further Reading

S&P 500 Passes 4,000—And These Market Experts Think It Can Keep Climbing Higher. Here’s Why. (Forbes)

Dow Jumps 200 Points: Stocks Fend Off Third Day Of Losses Despite Biotechs, Netflix Falling (Forbes)

I’m a reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Before Forbes, I spent a summer reporting on the L.A. private sector for Los Angeles Business Journal and wrote about publicly traded North Carolina companies for NC Business News Wire. Reach out at jponciano@forbes.com.

Source: U.S. Economic Growth Is Peaking And That Means Stocks Could Struggle This Year, Goldman Warns

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Key quotes

“Economists predict 10.5% GDP growth for the second quarter, the strongest quarterly growth rate since 1978.”

“Growth in the third and fourth quarters of this year will clock in at 7.5% and 6.5%, respectively. Growth is then seen slowing in each quarter of 2022 — by the fourth quarter Goldman is modeling a mere 1.5% GDP increase.”

“Although our economists expect U.S. GDP growth will remain both above trend and above consensus forecasts through the next few quarters, they believe the pace of growth will peak within the next 1-2 months as the tailwinds from fiscal stimulus and economic reopening reach their maximum impact and then begin to fade.”

FX implications

The US dollar index drops 0.10% to trade at 91.25, as of writing. The dollar gauge resumes its downside momentum after facing rejection just below 91.50 in the US last session.

Latest Forex News

How To Weather Stock Market Storms

Life in the era of COVID-19 is certainly unlike anything the vast majority of us have experienced in our lifetime. The last time the world faced a pandemic of this magnitude, the year was 1918. People around the globe struggled to combat a new foe in the form of a flu pandemic which washed over the world’s population over the course of two years.

Today, we are fortunate to have many more tools to study and manage the coronavirus. We are learning more each day, which will hopefully lead to a faster resolution this time around. But there is one factor of our current situation that feels quite familiar—that has returned cyclically time after time over the course of my career: the corresponding stock market storm we’re seeing. That isn’t new—and it isn’t a once-in-a-lifetime event.

The Great Financial Crisis. The dot-com bubble. Black Monday. Through each of them, I’ve fielded calls and visits from clients who worried that everything was on the line. But just as proper gear and a safe place to hunker down can protect one even in the worst of storms, so can a solid investment plan. Because my clients and I had prepared for circumstances like the ones we faced, they were able to make it through—reaching a period of sunny skies with much of what they had worked so hard to earn intact.

What can you do to weather a stock market storm? Here are a handful of strategies to help ensure your safety even in an economic downpour.

Harness the power of dispassion

When the market outlook is good, people tend to coast, letting their investments enjoy the ride. But when it seems as if trouble is brewing, they begin watching the market—and their accounts—like a hawk, panicking at the slightest provocation.

Unfortunately, that panic can lead to poor choices and less-than-stellar results.

The best thing you can do when the clouds roll in is harness the power of dispassion, understanding that if you’ve put the proper safeguards in place, a little wind and precipitation won’t blow the whole house down. Doing so will protect you from unnecessary losses and missed opportunities when the market rebounds.

Let diversity work for you

The benefits of diversity extend to so many areas of our lives—and the way we allocate and manage our money is no exception. Ensuring a diversity of assets helps you avoid placing all of your eggs in that proverbial basket. And though you may have been counseled about growth versus value stocks, diversifying across different market sectors and a variety of bond types is important. It’s really about building a portfolio tailored to your unique circumstances—whatever they may be.

A good advisor will curate a mix of holdings that will withstand market trials and tribulations and ensure you have the funds necessary to cover the cost of any upcoming life events—from your daughter’s wedding to a grandchild’s college tuition, and even an extensive home renovation. And they will institute a sound plan for tomorrow, whether that entails traveling the world, long-term care for a disabled spouse, a cross-country move, or all of the above. Most important, though, is that your diversification plan is specific to you.

Depend on someone you trust

When it comes to navigating your investments, you can certainly go it alone. Many people do—to varying degrees of success. But you can’t underestimate the power of a good advisor. What does that entail? Someone who moves beyond the conventional, with the experience and know-how to steer your ship through the choppiest of waters based on what they have learned in previous bad weather patches. It’s someone who will take into account your individual circumstances, crafting a strategy meant to fulfill your needs—and who considers not just what you must have to live comfortably, but also what you want.

That’s why I always ask my clients not only what their expenses look like—current and expected—but also what peace of mind looks like to them, and what they would do with their lives if money were no object. Those three inquiries help me compose a complete picture of the individual I’m working with, so I can build a plan that will weather whatever comes their way.

Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.Follow me on LinkedIn. Check out my website.

Debra Brede

 Debra Brede

Debra Brede had a different idea in mind when she founded her investment management firm in 1989. A decade of industry experience made her realize that the needs of individual clients weren’t always best served by the typical Wall Street business model, where a firm sells its products to meet its sales goals. At the firm that bears her name, the individual needs of each client would be the primary focus. Today, D.K. Brede Investment Management Company delivers investment management services to corporations, municipalities, retirement plans, charitable trusts, and high-net-worth individuals based on the principle that every recommendation made is dependent solely on a client’s individual needs, as determined personally by Debra Brede herself. Debra is now a frequent media commentator on investment-related topics and is recognizable to tens of thousands of CNBC and Fox Business news viewers around the world. She’s also been featured in the Wall Street Journal, The New York Times, Businessweek, Financial Times, Reuters, Bloomberg, Forbes, and Kiplinger’s Personal Finance. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

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Restricted Stock, Restricted Stock Units, Restricted Securities: Understanding The Differences And Why They Matter

Grants of restricted stock or restricted stock units (RSU) have become the equity compensation of choice for many public companies and some larger private companies. They may be granted instead of or in combination with stock options.

RSUs in particular are now the most frequently granted equity awards in public companies. However, companies, employees, and financial advisors often call RSUs “restricted stock” or “restricted securities.”

That lax use of terminology can be problematic and confusing, as those three things are not the same. As a lawsuit by current and former Uber employees shows, it’s important to know what type of stock grant you have and its tax treatment. In this article I explain the important differences between restricted stock, RSUs, and restricted securities.

Unidentical Twins

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Restricted stock, along with its nearly identical twin restricted stock units (RSUs), is a direct grant of company stock, as opposed to an option to purchase stock (as in stock options). The stock is “restricted” because it is subject to a vesting schedule, which can be based on time worked at the company after grant and/or on specified performance goals.

Restricted stock and RSUs used to be granted only to key employees and executives or as a replacement stock grant when you were leaving behind valuable stock options at another company. For a long time, stock options were the grant of choice for rank-and-file employees and managers.

However, stock options have become somewhat tarnished by changes in their accounting, concerns about shareholder dilution, option-backdating scandals, and the vast number of underwater options employees were stuck with from past economic downturns. As a result, many companies now grant restricted stock and RSUs more broadly to employees and managers, either in place of stock options or in combination with them.

Both restricted stock and RSUs are considered “full value” grants. This means that you receive the entire value and ownership of each share when it vests.

Example: You received a grant of restricted stock for 1,000 shares. At vesting the stock price is $15. You now have company stock valued at $15,000.

The table below shows key differences between restricted stock and restricted stock units, including their taxation. It is from the website myStockOptions.com, which has educational content and tools on all types of equity grants.

differences between restricted stock and restricted stock units
myStockOptions.com

* For the tax treatment of restricted stock and RSUs in other countries, see the Global Tax Guide at myStockOptions.com.

Explaining The Differences

The principal traits of restricted stock include the following:

  • At grant, restrictions on sale and the substantial risk of forfeiture exist until you meet vesting goals of employment length or performance targets.
  • Normally, the grant vests in increments over several years (graded vesting); but it can instead vest all at once (cliff vesting).
  • During the restricted period (i.e. the vesting period), dividends are usually paid, and grant-holders have voting rights, like shareholders.
  • Under Section 83(b) of the tax code, you can elect to be taxed on the value at grant rather than on the value at vesting—a tax flexibility that is not available with RSUs. This election allows you to pay tax on the lower value at grant, and not at vesting when you’re confident the stock price will be higher, and also start the capital gains holding period earlier. To make the election, you need to file it with the IRS within 30 days of the grant.
  • Some private companies grant early-exercise stock options that are immediately exercisable into restricted stock with its own vesting schedule.

Restricted stock units have many similarities, including that both represent compensation equal to the value of a share of stock. But important differences exist:

  • With RSUs, the stock itself is not issued or outstanding until the actual release of the shares at vesting. Before then, RSUs are essentially a bookkeeping entry—technically an unfunded promise to issue a specific number of shares (or a cash payment) at a future time once vesting conditions have been satisfied. For various reasons, RSUs are now more commonly used than restricted stock, including that they are easier for your company to administer. Stock-settled RSUs are much more common than cash-settled RSUs.
  • Under most RSU plans, such as RSU grants made by Amazon, Microsoft, Apple AAPL +0.1%, and Intel, the delivery of shares occurs at vesting. These plans are similar in concept to standard time-vested restricted stock.
  • A small number of companies have RSU plans with a tax-deferral feature that lets you select a later date for share delivery, which also delays the income tax. Alternatively, the company can specify a date for deferred delivery (e.g. retirement).
  • Larger private companies tend to grant RSUs that require an additional vesting condition of a liquidity event, such as its acquisition or IPO.
  • Holders of unvested RSUs have no shareholder voting rights and, depending on the plan details, may or may not receive dividend equivalents. Ask your company if you’re not certain about whether and when it pays dividend equivalents on its RSUs.

Restricted Securities

Restricted securities are shares that are not registered with the SEC, such as shares in a private company. They have a formal definition under the US securities laws. When you work for a startup or fast-growing private company that hopes to get acquired or go public, the shares you receive from your restricted stock or RSU grants are also restricted securities. The stock investors buy in a private company are also restricted securities.

The “restrictions” in restricted securities, such as the special resale holding periods under the SEC rules, come from the securities laws, whereas the vesting restrictions in restricted stock come from your company. Restricted securities are resold under SEC Rule 144 or another SEC registration exemption, until registered with the SEC in an IPO.

When the shares are owned by a senior executive or director (i.e. an affiliate), they are also called control stock, even when acquired from an open-market purchase or from stock compensation. Technically, the phrase “restricted shares” also refers to restricted securities, though some companies confusingly use “restricted shares” to mean restricted stock grants.

When you acquire restricted securities, the stock certificate will have a legend stamp indicating that the shares are restricted and therefore cannot be resold unless they are registered with the SEC or unless an exemption applies. This legend will need to be removed before you can resell the stock.

Ready For A Quiz?

Test your knowledge of restricted stock units and restricted stock with two free interactive quizzes on myStockOptions.com:

Bruce Brumberg, JD

 Bruce Brumberg, JD

I’ve devoted most of my professional career to making complex legal and tax concepts understandable to people who do not enjoy reading the Internal Revenue Code or the US securities laws. In myStockOptions.com, I created the premier online resource of educational content and tools on stock compensation (stock options, restricted stock, and employee stock purchase plans) for plan participants, financial advisors, and companies. myNQDC.com is a sibling website I created on nonqualified deferred compensation. With the resources on these websites and my other writing and speaking, I try to help you get more value out of these compensation plans and prevent mistakes. While I have a law degree (University of Virginia), for most of my working life I’ve created legal, tax, and financial-planning publications, websites, books, and videos. I also coach a high-school tennis team and co-wrote with my wife a popular travel book, Watch It Made in the USA: A Visitor’s Guide to the Best Factory Tours and Company Museums. Follow me on Twitter. Check out my website

Stock Market Rout: Here’s What Caused The Worst Sell-Off Since March

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The stock market tanked on Thursday amid fears of a possible second wave of coronavirus infections as states that have started lifting lockdowns begin to see a record number of new cases.

KEY FACTS

The Dow Jones Industrial Average fell 6.9%, nearly 1,900 points, in its worst single-day drop since the coronavirus sell-off in March. The S&P 500, which fell 5.9%, also had its worst day since March.

Stocks plunged on rising concerns about a second wave of coronavirus infections: Many states that loosened lockdown restrictions saw a spike in new cases.

Texas and Florida, for example, were among some of the first states to reopen, and they are now reporting record numbers of hospitalizations. A total of 21 states reported an increase in new cases last week, according to a Reuters analysis.

Thursday’s sell-off follows the Federal Reserve’s grim update on the economy: A day earlier, the Central Bank forecasted a long recovery, with unemployment set to remain high for years and interest rates staying near zero until at least 2022.

“Fed chair Powell yesterday really reminded investors that there’s a huge, huge gap between the economic reality and the market reality,” Tom Essaye, founder of the Sevens Report, told CNBC. “Just that reminder combined with a lot of the second wave headlines prompted an opportunity to take profits… stocks can’t go up forever.”

Expectations for a quick economic recovery are dwindling: Investors are now dumping stocks that would benefit from a reopening—including airlines, retailers and cruise operators—after they led the market rally over the past month.

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Wall Street traders are instead rotating back into stay-at-home stocks, such as Netflix and Zoom, as well as big tech companies like Apple, Amazon, Microsoft and Google-parent Alphabet.

The stock market’s fear gauge, the CBOE Volatility Index, skyrocketed over 47% on Thursday, breaking above the 40 threshold for the first time in over a month.

Crucial quote

“The REAL reasons stocks are down doesn’t have much to do with fundamentals – the tape had become GROSSLY overbought (with valuations hitting multi-decade, unsustainable highs),” according to Adam Crisafulli, founder of Vital Knowledge. “A lot of reluctant buyers were sucked in off the sidelines these last few weeks, creating a giant downside air pocket that’s now being filled.”

BIG NUMBER: MORE THAN 44 MILLION.

That’s how many people have filed for unemployment over the last three months, as the coronavirus pandemic forced businesses to shut down on an unprecedented scale. Jobless claims fell for the tenth week in a row on Thursday, with 1.5 million more Americans filing for unemployment during the week ending June 6. While that number continues to decline, millions are still unemployed and the job market’s recovery is expected to take years.

Tangent

“We can’t shut down the economy again,” Treasury Secretary Steven Mnuchin told CNBC on Thursday morning. “I think we’ve learned that if you shut down the economy, you’re going to create more damage,” he warned.

Key background

Both the S&P 500 and Dow are still up more than 40% from their coronavirus low point on March 23. Federal Reserve chairman Jerome Powell reiterated at his press conference on Wednesday that while “there is great uncertainty about the future,” the Central Bank is strongly committed to doing “whatever we can, for as long as it takes” to help support the economy. Before this week, stocks had continued to rally on optimism about reopening the economy and a faster-than-expected recovery from the coronavirus recession: The S&P 500 on Monday turned positive for 2020, fully recouping its losses from the coronavirus selloff earlier this year. But the market is now taking a hit amid rising concerns over a second wave of coronavirus cases. With investors rotating out of stocks that would benefit from an economic reopening, big-tech shares have made a comeback: That helped boost the Nasdaq to a new record high on Wednesday, when it closed above 10,000 for the first time ever.

Full coverage and live updates on the Coronavirus

Follow me on Twitter or LinkedIn. Send me a secure tip.

I am a New York—based reporter for Forbes covering breaking news, with a focus on financial topics. Previously, I wrote about investing for Money Magazine and was an intern at Forbes in 2015 and 2016. I graduated from the University of St Andrews in 2018, majoring in International Relations and Modern History. Follow me on Twitter @skleb1234 or email me at sklebnikov@forbes.com

Source: https://www.forbes.com/

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Feb.28 — Fear over the spread of the coronavirus tightened its grip on global markets Friday, with stocks across Europe and Asia plunging a day after the worst rout on Wall Street since 2011. Rupert Harrison, multi-asset strategies portfolio manager at BlackRock, discusses the sell-off on “Bloomberg Surveillance.”
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