GOLDMAN SACHS: Here's what you should buy to take advantage of a stock market rebound
- Goldman Sachs argues that investors should be buying stocks following a 10% correction in all major US indexes.
- The firm highlights areas of the equity market that have historically outperformed following corrections.
Now that the S&P 500 has experienced a long-awaited 10% correction, it's time for investors to start buying in earnest.
So says Goldman Sachs, which notes that traders who started buying the benchmark index after past 10% declines made money over the next three, six, and 12 months 75% of the time.
What's more, per Goldman's experience, investors want to keep buying.
"Despite the market decline, investors have expressed agreement with our view that fundamentals remain healthy," Goldman chief US equity strategist David Kostin wrote in a client note. "Rather than potential downside, most conversations have focused on what to buy in anticipation of the eventual recovery."
So the question then becomes: Where should they be looking to invest?
To answer that, Goldman has looked at past post-correction periods and found that traders have preferred cyclical sectors to their defensive counterparts. The firm specifically highlights materials and industrial stocks, which have both outpaced the S&P 500 by roughly 270 basis points during the three months following past corrections, according to Goldman data.
Looking at specific investment factors, Goldman shines the spotlight on low valuation (350 basis-point outperformance vs. S&P 500) and small-cap stocks (240 basis point outperformance) as the two best bets.
A third area for stock traders to pursue is one that's already been floated by Goldman in past weeks, even before the market correction: companies with low labor costs. See this Business Insider article from late January for a list of the stocks included in a Goldman index designed to track companies set to beat the market as wages rise.
Still not convinced the market is likely to bounce back, as Goldman suggests? We'll leave you with the chart below, which shows the path of the S&P 500 following 11 prior instances of market corrections. The slope of the dotted line should tell you everything you need to know about Goldman's stance.
