As Obi-Wan Kenobi might have said "This is not the debt ceiling debacle you are looking for." That is the seeming 180-degree shift that Goldman appears to have taken with its latest missive on the pending 'discussions'. Their reasoning that this time is different is based on the fact that, in contrast to now, the S&P 500 seemed immune to 'cliff' risks and traded in the 1300 range for the first half of 2011, even as the macro backdrop began to sharply deteriorate. Their models suggest it was clear that risk sentiment was buoying the market even as macro fundamentals were deteriorating. Goldman's view is that the swift market 20% sell-off was in part a reflection of a levitating market reconnecting to still-deteriorating macro fundamentals, possibly catalyzed by the political debate. This time around, they claim, the macro backdrop is, at least for now, stable and far better then in 2011, which perhaps, will allow the market to better absorb the upcoming debt ceiling debate.
In Summer 2011, Macro data was weak but risk remained bd... until it caught down
Now, risks and stocks appear on the same trajectory - though European risks seem a little exuberant...
Hhhm, we are not so sure this 'levitated' market is perhaps just as prematurely exuberant as last summer... perhaps this chart will help them?
Of course, as always they have an out (though this is not their base case)
Of course all of this can change if the data weakens. And after a long patch of steady macro improvement, perhaps that is a current vulnerability, particularly for a market that has rewarded cyclical exposures consistently over the last several months. Indeed, early signs are that December GLI is pointing to a growth slowdown, which is consistent with our near-term US forecast, which calls for some slowing in 1Q before some reacceleration thereafter.