Goldman Sachs: Long Term Stock Prospects

Here’s What Will Happen When Fed Raises Rates

Stocks look much more attractive than bonds–at least through 2018. “We forecast a dramatic divergence between stock and bond returns during the next several years,” a Goldman team led by stock strategist David Kostin wrote to clients this week. Goldman predicts the S&P 500 will generate a 6% annualized total return between now and 2018, compared to a 1% annualized gain for the benchmark 10-year Treasury note, assuming the Fed starts raising rates in the middle of next year. Goldman predicts the federal funds rate, which has been pinned near zero since the financial crisis, will reach 4% by 2018. The last time the Fed raised rates was in June 2006. ... Goldman predicts the S&P 500 will rise by about 8% over the next 12 months, which would take the stock index close to 2100. It closed Monday at 1939. The firm estimates the S&P 500 will reach 2300 by the year 2018, with the 10-year yield climbing to 4.5% from its current 2.5% level. Bond yields and prices move inversely of one another. And as the Fed gradually raises rates over the next several years, Goldman expects the U.S. economy will keep growing at about a 2.0%-to-2.5% rate.

Goldman: 'Dramatic divergence' coming in market
Stocks will significantly outperform bonds in the years ahead as investors get used to interest rates that will rise more than consensus expectations, according to an analysis from Goldman Sachs. Goldman foresees the Federal Reserve raising rates in the third quarter of 2015 and taking its funds rate all the way to 4 percent eventually, about double the level predicted by many in the market, including bond manager Pimco, which foresees a short-term "neutral" level of half that. "We forecast a dramatic divergence between stock and bond returns during the next several years," Goldman strategist David J. Kostin and others wrote in a note to clients.
Comment: We have several Bond ETFs: BND and AGG. Neither are performing well.

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