Unsurprisingly, investors reacted by selling municipals at a historic pace. As such, issuers have turned to seeking additional verification, as a stamp of approval that projects are aligned with the intention of the label. Goldman Sachs ( GS) warned on Wednesday of economic ripple effects in the aftermath of the Silicon Valley Bank ( SIVB) and Signature Bank ( SBNY) busts. What is more interesting to reflect on is the percentage of issuance of these types of bonds, which has grown from 2% in 2018 to almost 11% by the end of 2022. We do not anticipate meaningful ratings changes but do expect to see a ratings environment that reflects the typical credit cycle. Over-levered is a term used to describe a company which has taken on too much debt. Over the last few quarters, Moody's and S&P have placed these sectors on negative outlook citing similar concerns. Clients portfolios experienced more volatility than usual because equities and bonds declined at the same timea rare occurrence that has been observed only 2% of the time since 1926. Strategists led by Goldman's chief economist, Jan Hatzius, said there's now a 35% chance of a US recession, up from the bank's previous forecast of 25%. And the decisions they make have huge consequences, not just for the bottom line, but for communities, cities, even entire countries. Goldman said that small- and medium-sized banks play an important role in the economy, noting that banks with less than $250 billion in assets make up about half of U.S. commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending, and 45% of consumer lending. Bank Stocks Rally on Speculation Fed Will Pause Rate Hikes to Shore up Sector, Banking Chaos Could Prompt Fed to Slow or Pause Rate Hikes, Markets Pare Big Losses, End Mixed on Banking Fears, US Equities Drop as Bank Worries Rattle Markets, China Sets Lowest Economic Growth Target in Three Decades, Ahead of G20, IMF Warns of Worsening Global Economy. Municipal Securities are subject to credit/default risk, interest rate risk and certain additional risks. Defaults make up 0.03% of the ~$4TN municipal market. Lastly, investors will be watching how much of the higher education sector manages to navigate its way through enrollment declines and endowment investment losses. A bond with a credit rating of BBB or above from an independent rating service such as Standard and Poors. Municipal investors can earn meaningful tax-free income at current levels. THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO. Goldman economist . as well as other partner offers and accept our, Photo by Thomas Koehler/Photothek via Getty Image, We interviewed the CEOs of 4 of Warren Buffett's most iconic businesses. Goldman Sachs has again lowered its forecast for US economic growth in 2022, to reflect tighter financial conditions as the Federal Reserve aggressively hikes interest rates. 1151 0 obj <>stream "We therefore expect that the recent tightening in financial conditions will persistin part because we think the Fed will deliver on what is pricedand therefore see a growth downgrade as appropriate," they added. Over the past couple of years, a confluence of factorsa global pandemic, surging inflation, war in Europe, aggressive monetary tightening and a cost-of-living crisishas rocked the boat for investors like never before. As of December 31, 2022. Quarterly State and Local Total Receipts data is de-annualized. Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein. Influential people and institutions across the globe rely on Goldman Sachs to support them in all they do. The views and opinions expressed may differ from the views and opinions expressed by Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Bond investors suffered some of the largest losses in generations as inflation levels not seen in over 40 years led to unprecedented tightening by the Federal Reserve. ; in Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in Japan by Goldman Sachs (Japan) Ltd; in Australia by Goldman Sachs Australia Pty Limited (ACN 092 589 770); in Singapore by Goldman Sachs (Singapore) Pte. The bank crisis shouldn't have come as a surprise to markets, given the Fed's rapid withdrawal of liquidity and policy tightening of the last year, according to Seema Shah, chief global strategist at Principal Asset Management. Investors are urged to consult with their financial advisors before buying or selling any securities. Read more:We interviewed the CEOs of 4 of Warren Buffett's most iconic businesses. This material represents the views of the Investment Strategy Group (ISG) in the Consumer and Wealth Management Division of Goldman Sachs and is not a product of Goldman Sachs Global Investment Research (GIR). "If the Fed is scared, you should be scared," he said in a CNBC interview on Wednesday. Mutual funds may benefit disproportionately given the level of withdrawals encountered and their asset base relative to the size of the overall municipal market. Goldman Sachs chose to undertake the audit voluntarily, so that it could assess the initiatives' impact. We believe elevated tax-free yields, coupled with a steady interest rate backdrop, will drive strong demand across all municipal investment vehicles in 2023. Amidst these complicated topics, a couple of concrete themes emerged in sustainable finance within the municipal market, namely: continued strength in labeled issuance; investor scrutiny to avoid greenwashing, and increasing regulatory focus. Bond prices fluctuate inversely to changes in interest rates. Any mention of an investment decision is intended only to illustrate our investment approach and/or strategy, and is not indicative of the performance of our strategy as a whole. As a result, we see more lower-rated credit opportunities. 2023 Goldman Sachs. Seizing the opportunities these changes may create calls for a new approach rooted in a more holistic view of asset allocation with increased attention to risk. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. The bank's economists forecast US GDP will expand by 2.4% this year, down from an estimate . In particular, large private universities with sizable endowments and hospital systems with strong cash reserves should benefit from relative credit rating stability and tend to be well positioned from a management perspective to navigate financial challenges. Goldman Sachs cut its US GDP growth outlook for 2022 and 2023, saying financial conditions are tighter. Taxable municipal issuance was the lowest since 2018 and more than 60% below 2020 and 2021 volumes due to the spike in Treasury yields, which made refinancings uneconomical for issuers. Influential people and institutions across the globe rely on Goldman Sachs to support them in all they do. In 2023, the market will debate when the Fed will take a pausewith great attention to individual economic numbers each month. Security selection within this space will be more critical than ever this coming year. Learn more about us, our purpose and our commitment to clients. With the easing of - Scott Diamond, Co-Head AM Municipal Fixed Income, - Sylvia Yeh, Co-Head AM Municipal Fixed Income, - David Alter, Head of AM Municipal Research. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. We would expect these ratios to be on the lower end versus recent history given the supportive technical backdrop. Many states and local governments are heading into the 2023-24 budget season in a strong position. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. That has the potential to create volatility in bond marketsand that will create opportunity., First TINA, now BOBA wise choice in our opinion given the sharp rise in yields presents the most attractive income and total return potential in more than a decade. Since 2020, job openings and core consumer price inflation have been strongly correlated.Goldman noted that post-pandemic rises in US job openings were concentrated in industries that typically see employment fall when financial conditions tighten. This material may not be published, broadcast, rewritten, or redistributed. Using the base year, the report provides estimated market data for the . To say 2022 was a tumultuous year is an understatement. In addition to healthcare, we believe that there are a variety of areas that have the potential to offer an attractive risk/reward trade-off in high yield space. The following questions will help us determine the right team for you. Climate-related disasters continue to intensify, and in 2022 alone there have been 15 weather disaster events in the US with losses exceeding $1bn each, compared to the 1980-2021 annual average of only 7.7 events.2 One of the largest was hurricane Ian in Southwest Florida, which caused damages estimated north of $30bn. Actual data will vary and may not be reflected here. Something went wrong, please try again later. The most comprehensive solution to manage all your complex and ever-expanding tax and compliance needs. The value of investments and the income derived from investments will fluctuate and can go down as well as up. At this time, we expect any weakening in trends to be manageable. Can You? Goldman Sachs sees the Federal Reserve acting aggressively to tighten monetary policy through the rest of the year. UBS Group AG is asking the Swiss government for a backstop if it were to buy Credit Suisse Group AG , Bloomberg News reported on Saturday. Indices are unmanaged. Here's how the firm would play that environment. Exclusive news, data and analytics for financial market professionals, Reporting by Niket Nishant in Bengaluru; Editing by Devika Syamnath, China's on the move again, economic outlook brightens, Japan's biggest banks to raise housing loan rates after BOJ's policy tweak, Japan's tourism restart stirs hope of service-sector recovery -PMI, South Korea's Sept inflation slows but tightening bias seen intact, UBS seeks Swiss backstop in any Credit Suisse deal - Bloomberg News, Goldman Sachs cuts outlook for European bank debt over Credit Suisse crisis, ECB's Wunsch does not see repeat of 2008 financial crisis, SVB UK handed out over 15 mln stg in bonuses days after HSBC rescue - Sky News, BlackRock says not participating in any Credit Suisse takeover plan. See here for a complete list of exchanges and delays. Equity markets dropped precipitously, interest rates rose at the fastest pace in decades and commodity prices gyrated in response to high inflation and geopolitical tensions. Wider credit spreads driven by historic outflows, has created significant valuation dispersions. We look forward to beginning a conversation to help you achieve your objectives and make the impact you desire. This is sharply lower than the 5.8 percent we anticipate for Q4 of this year. Three themes drove municipal performance: Where does this leave us heading into 2023? UBS to Explore Credit Suisse Deal in Crisis Combination, CFA Revised Exam Cuts Study Time, Stresses Practical Skills, LME Rocked by New Nickel Scandal After Finding Bags of Stones, How First Republic Bank Received a$30 Billion Lifeline, UBS, Credit Suisse Oppose Idea of Forced Tie-Up. The fallout in the banking system has raised the chances of a downturn, in Goldman's view, even as markets price in smaller rate hikes or a pause from the Federal Reserve at the March meeting. Credit Suisse was thrown a $54 billion lifeline by the Swiss central bank on Thursday to shore up liquidity . As we begin the new year, we wanted to take a look at the global economic outlook for 2023 and share some insights from some of the biggest names in finance. Since December, when it predicted 3.8% growth, it has cut its outlook more than once.Its economists said that since April, financial conditions have tightened to a level that should drag on GDP growth by about 1 percentage point, but also bring inflation down to the Fed's 2% target. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Goldman Sachs warned on Wednesday of economic ripple effects in the aftermath of the Silicon Valley Bank and Signature Bank busts.The investment bank's chief economist Jan Hatzius slashed his 2023 GDP forecast by 0.3% in a new note out Wednesday afternoon. Goldman Sachs cut its outlook for economic growth this year, pointing to troubles in the banking sector. Past performance does not guarantee future results, which may vary. Sign up for our newsletter to get the inside scoop on what traders are talking about delivered daily to your inbox. In this uncertain environment, we recommend our clients portfolios be positioned at their customized strategic asset allocation, where they are designed to ride out volatility and provide staying power in the event of geopolitical disruptions. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any clients account should or would be handled, as appropriate investment strategies depend upon the clients investment objectives. Mar 15, 2023 01:55 pm. In a note released late Friday, Goldman now sees GDP growth of 1.1% next year, down from its prior call for 1.5% growth from the fourth quarter of 2022 to the end of 2023. Portfolio holdings and/or allocations shown above are as of the date indicated and may not be representative of future investments. As we wrote in our 2022 Outlook, last year was a time for investors who had been underweight munis, short duration, and/or maintaining elevated cash levels to gradually get to a more neutral overall positioning as yields materially rose. The Wall Street firm's new outlook stems from "increased near-term . 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