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relates to Take a Peek on the ECB's 38th Floor as Philip Lane Awaits Role relates to Bond Traders Are About to Get a Big Update on Fed's Portfolio relates to ECB Moves Closer to Global Dovish Shift as Coeure Mulls Loans relates to Emerging Markets Retreat Amid Global Growth Concerns: EM Review relates to Fed Will Probably Change Its Approach to Inflation, Dudley Says relates to Pemex Assistance Plan Fails to Impress Bondholders relates to Hedge Funds See Windfall From Bets on Puerto Rico After Storm relates to Fed’s Clarida Watches a Price Gauge That Just Tied a Record Low relates to Surprise! Refinancing Complex Debt Instruments Is Hard relates to Duterte Signs Bills to Ease Inflation, Boost Central Bank Powers
relates to Take a Peek on the ECB's 38th Floor as Philip Lane Awaits Role relates to Bond Traders Are About to Get a Big Update on Fed's Portfolio relates to ECB Moves Closer to Global Dovish Shift as Coeure Mulls Loans relates to Emerging Markets Retreat Amid Global Growth Concerns: EM Review relates to Fed Will Probably Change Its Approach to Inflation, Dudley Says relates to Pemex Assistance Plan Fails to Impress Bondholders relates to Hedge Funds See Windfall From Bets on Puerto Rico After Storm relates to Fed’s Clarida Watches a Price Gauge That Just Tied a Record Low relates to Surprise! Refinancing Complex Debt Instruments Is Hard
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Goldman Drops Strong Balance Sheet Recommendation on Dovish Fed

Goldman Drops Strong Balance Sheet Recommendation on Dovish Fed

Views Of The Federal Reserve As The Federal Open Market Committee Begins Its Two-Day Policy Meeting

Photographer: Andrew Harrer/Bloomberg

Views Of The Federal Reserve As The Federal Open Market Committee Begins Its Two-Day Policy Meeting

Photographer: Andrew Harrer/Bloomberg

Goldman Sachs Group Inc. is no longer advising an investment strategy for near-term returns it has held for the past two years.

Because of a more dovish Federal Reserve, stabilizing economic growth and stretched valuations, the bank is closing its recommendation to buy stocks of companies with strong balance sheets. They outperformed those of firms with weak balance sheets since the Fed began its interest-rate increases at the end of 2016.

“The risk-reward has recently become less favorable,” Goldman strategists led by David Kostin wrote in a note dated Feb. 8.

A pause in the Fed’s hiking cycle should help companies with weak balance sheets, whose shares tend to outperform in periods of easing financial conditions, according to the strategists. On the flip side, stocks of companies with strong balance sheets are among the worst performing in the year following the end of Fed hiking cycles, when U.S. Treasury yields typically also decline.

Goldman also notes that strong balance-sheet shares typically underperform when economic growth is strong or accelerating, and vice versa. The firm assigns only a 10 percent probability of a U.S. recession in the next 12 months.

Valuations also look attractive. The median strong balance-sheet stock trades at 24 times forward earnings, compared with 14 times for weak balance-sheet equities.

That said, the investment bank still deems strong balance-sheet stocks attractive for longer-term investors or as a “tail risk hedge.”