Closing the Gender Gaps…Re-Imagining Big Oils...Managing Bear Market Risk
Closing the Gender Gaps: Advancing Women in Corporate America
Above: The authors of Closing the gender gaps atop Goldman Sachs' New York headquarters
Consider this: women in the US need to work four years longer than men to overcome the persistent gender wage gap. But perhaps more revealing is how much of that gap cannot be explained by measurable factors captured in labor market studies: the majority of the 20% pay disparity, according to a new report from Goldman Sachs' Global Markets Institute. Gender imbalances in hiring play a role, but the fact that women make up about 40% of employees at S&P 1500 firms -- but only 6% of CEOs -- suggests that adjusting hiring practices can't be the cure-all. In Closing the gender gaps: Advancing women in corporate America, the authors focus on some of the factors affecting women as they progress through their careers, offering strategies companies can use to level the playing field. These include helping women re-enter the workforce or "upshift" their careers, carefully reviewing compensation data, and adding women to companies' boards.
Big oil companies are at the center of the global carbon debate because they produce and market energy products that account for around 10% of global energy sector carbon emissions. However, Michele Della Vigna of Goldman Sachs Research sees a fundamental realignment underway to transform Big Oils into Big Energy, a shift which could ultimately reduce carbon emissions and help contain global warming within two degrees Celsius. Della Vigna credits Big Oils' ability to adapt to new technologies, and proposes shifts in production (from oil to gas) and changes in industrial operations (from refining to petrochemicals) as some of the ways in which Big Oils can transform into broader and cleaner energy providers. "If Big Oils deliver on all of these changes and evolution in their current business, they can reduce carbon intensity by about 20% by 2030," Della Vigna says.
The Unsteady Undertow Commands the Seas (Temporarily)
The recent market downdraft has rekindled fears that the longest bull market in history is coming to an end. But the steady factors that have underpinned this expansion -- solid US economic growth, robust corporate earnings, record buybacks and relatively low inflation and interest rates -- remain in place and will likely continue to prevail over the unsteady undertow of risks, according to a new report released by the Goldman Sachs' Investment Strategy Group. "As we review the geopolitical developments of 2018, it is clear that some of the risks have abated while others have increased," noted the authors, who continue to maintain a low 10% probability of recession. "With the exception of a significant spike in oil prices...we believe that the net impact of these shifts is not material enough to derail the US economic expansion or bull market."
Talks at GS: Walter Isaacson on the Making of a Genius
Above (L to R): John F.W. Rogers of Goldman Sachs and author Walter Isaacson
What makes a genius? Part of the answer lies in an environment that allows genius to thrive, according to Walter Isaacson, the author of definitive biographies of Benjamin Franklin, Albert Einstein, Steve Jobs, Leonardo da Vinci and others. "There are certain cradles of creativity that occur," Isaacson said during a recent episode of Talks at GS moderated by Goldman Sachs' chief of staff, John F.W. Rogers. "Florence in 1470 when Leonardo arrives. Philadelphia in 1770 when they start holding Continental Congresses there. Silicon Valley in the Bay area in the 1970s when Steve Jobs and Bill Gates and all these people come to the Homebrew Computer Club." A diverse mix of interests and backgrounds and a culture of tolerance are what allow cradles of creativity to occur, according to Isaacson, who has returned to his native New Orleans in pursuit of such an environment. Increasingly, Isaacson says, the "creative, diverse mix" that creates an environment for genius to thrive can be found "at the local level."
The recent pick-up in market volatility has rattled investors enjoying the longest bull market on record for balanced portfolios consisting of 60% equities and 40% bonds. How can investors guard against the risk of a 'Balanced Bear' -- a drawdown where both asset classes might experience meaningful declines at the same time? We caught up with Goldman Sachs Research's Christian Mueller-Glissmann on lessons that can be drawn from previous market declines.
In a research note you published last year, The Balanced Bear, you argued that while equities and bonds appeared expensive relative to history, a full-fledged bear market was unlikely in the near term. Where do we stand today?
Christian Mueller-Glissmann: We still think lower risk-adjusted returns for balanced portfolios made up of 60% stocks and 40% bonds are more likely than a large sell-off in both asset classes. High valuations alone are not sufficient for a drawdown -- and valuations across assets have in fact started to de-rate this year. An increase in bear market risk in equities, bonds or both requires a material growth or inflation shock, but typical drivers remain absent despite the long cycle. Still, we have seen a pickup in drawdowns this year, both in February and just recently, with both bonds and equities falling together. With a worsening growth and inflation mix in most markets, we think there is potential for more volatility.
What does history tell us about the risks of trying to time the market?
CMG: Being underinvested, particularly late in the economic cycle, can be costly since both equities and bonds tend to perform well up until the start of a bear market. Since 1990, the S&P 500 has delivered an annual return of about 10%. While investors would have reaped returns of close to 18% if they had avoided the month with worst returns each year, missing out on the month with the highest returns would have proved costly as well. In the latter scenario, returns would have dropped to 1.5% per year -- lower than those for 10-year U.S. bonds. While the reward for perfect market timing is large, there can also be a significant cost if investors are missing months with good returns. For investors with long investment horizons, a simple buy-and-hold strategy appears more attractive than trying to time the market.
You've done extensive cross-asset research on the importance of portfolio diversification. What are your key conclusions?
CMG: Broader diversification has usually improved risk-adjusted returns over longer time horizons. We find that adding non-U.S. equities might help improve returns on a US 60/40 portfolio from here -- provided there is no bear market. At the same time, and in contrast to the last 30 years, we see little value in adding non-U.S. bonds given their low yields and exposure to rate-shock risk. Ultimately, there is no consistent "safe asset" or "hedge" across drawdowns because different assets protect against different types of shocks. Rather, we suggest a combination of strategies tailored to the source of potential shocks.
In addition to broader diversification, how else can investors most effectively reduce risk?
CMG: We've assessed several strategies to manage big unforeseen sell-offs in equities known as "tail risks." While each strategy -- which may rely on dynamic allocations or option overlays -- has its shortcomings, they can complement each other and help improve the risk-adjusted returns of a diversified multi-asset portfolio. All of these strategies are worth exploring because at this point, improving the risk profile of a 60/40 portfolio seems more realistic than materially increasing returns.