US investors haven’t had the easiest time in 2022. The stock market is troubled. the bond market is having its worst year on record. major cryptocurrencies such as Bitcoin have retreated. and even the once-hot housing market is starting to crack.
Everywhere you look, asset prices are falling. That means it’s been a tough year for those looking to park some extra cash in a place where it will actually yield, at the very least, a return.
But a team at Goldman Sachs, led by chief U.S. equity strategist David J. Kostin, offered some advice to investors looking to navigate these treacherous markets in a research note Tuesday.
Their advisors focus on an age-old question for stock market investors: What’s better, value stocks or growth stocks? Or what if, these days, it’s neither?
Growth vs value
For the uninitiated, value stocks are undervalued relative to their fundamentals (ie, revenue, net income, cash flow, etc.) than most publicly traded companies, while growth stocks are valued at much richer valuations because they have growth rates that are significantly higher than the market average.
Lyft is a good example of a growth stock. The rideshare giant is expected to grow sales by 27% this year and is highly valued by the market, but posted negative net income in the spring quarter. Company growth is the thing to invest in, in other words.
Hewlett-Packard, on the other hand, is a solid example of a value stock. The multinational tech giant’s revenue rose less than 5% in the spring quarter, but its stock trades at just eight times earnings, compared with an average price-to-earnings ratio of 13.1 for the S&P 500. There’s plenty of credible value.
Choosing between value stocks and growth stocks is always a challenge for investors, but in the years since the Great Financial Crisis, growth stocks have enjoyed an incredible era of outperformance led by high-tech companies.
But now, with the Federal Reserve raising interest rates, the risk of a recession rising and inflation peaking, Goldman says value stocks are about to have their day.
“Current relative valuations in the equity market suggest that the value driver will generate strong returns over the medium term,” the Goldman team wrote, adding that value stocks should outperform growth stocks by three percentage points over the next year.
Investors may want to be cautious when investing in growth stocks because these stocks will need a “soft landing” and falling interest rates to outperform the S&P 500, Goldman argues.
Additionally, growth stocks look particularly expensive in terms of earnings and revenue multiples.
“Extremely inflated valuations can sometimes be justified by expectations of extremely rapid earnings growth. However, expectations today – even if they turn out to be accurate – do not appear to justify the current growth stock multiples,” the Goldman team wrote.
Goldman strategists also noted that value stocks have historically outperformed growth stocks around the onset of recessions. And with most economists predicting a U.S. recession this year, it might make sense to avoid richly priced growth names and look for value plays.
However, it is important to note that Goldman economists still see only a one in three chance of a US recession next year and a 48% chance of a recession by September 2024.
However, the Goldman team also pointed out that value stocks have historically outperformed growth stocks around peaks in inflation, as measured by the consumer price index (CPI). And Goldman’s chief economist, Jan Hatzius, said in August that he believed inflation had already peaked, even if it was likely to remain elevated by historical norms through the end of the year.
“Value exceeded 12-month growth after seven of the last eight year-over-year peaks in core CPI inflation,” Goldman’s team wrote on Wednesday.
Of course, there is another possibility investors may want to consider. Goldman didn’t mention that strategy in its note, and it doesn’t include stocks at all.
A safe haven?
While value stocks may outperform growth stocks over the next year, many investors are likely to be unwilling to return to the market amid calls from investment banks for more pain ahead.
Morgan Stanley, for example, has repeatedly warned that a toxic economic mix of “fire” (inflation and rising interest rates) and “ice” (falling economic growth) is set to keep stock prices subdued until late 2023.
Many investors have tried to turn to cash as a safe haven in these tough economic times, but Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, argues that “cash is still junk” because of rising inflation.
Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a research note Wednesday that there is another option that could be more profitable.
“Amidst the current uncertain backdrop, we favor the Swiss franc as the safe haven of choice in foreign exchange markets,” he said. “The nation is less affected by the European energy crisis than its neighbours, as fossil fuels account for just 5% of the country’s electricity generation. The currency is also supported by a central bank that is both willing and able to quickly bring inflation back to target.”
The Swiss franc has appreciated more than 7% against the euro since June as growing recession fears continue to drive investors to the safe haven. And as Stéphane Monier, chief investment officer at Lombard Odier Private Bank, said in an August 31 article:
“The Swiss National Bank (SNB) is tackling rising prices with higher interest rates. Unlike other policymakers, it has signaled a willingness to intervene to keep the Swiss franc strong.”
The Swiss franc also has a history of outperforming the dollar. Since its inception in 1999, the franc has gained 30% against the dollar.
This story was originally featured on Fortune.com