Are you ready for a 12% decline?
You better be, according to Goldman Sachs chief U.S. equity strategist David Kostin.
Last week Kostin – who replaced famed perma-bull Abby Joseph Cohen – urged Goldman clients to immediately pull their money out of the stock market to avoid the so-called fiscal cliff.
The strategist fervently defended his year-end S&P 500 target of 1,250 despite the SPX’s recent climb above 1,400. Essentially, Kostin is predicting a 12% decline over the next four months. The statistical chance of that actually happening – based on options at the 1,250 strike price that expire in December – is 20% (I’ll get to the significance of this later).
His stated reason: “Political realities and last year’s precedent suggest the potential that Congress fails to reach agreement in addressing the fiscal cliff is greater than what most investors seem to believe based on our client conversations.”
As a refresher, the “fiscal cliff” is the expiration of payroll, capital gains and dividend tax cuts at the end of this year. Remember the vicious debt ceiling fight last summer? Well, it’s back.
And so is the opportunity for financial institutions to peddle fear.
As the market has moved higher throughout the year, Kostin has repeatedly backed his 1,250 call to the detriment of those who have shorted the S&P 500 based on Kostin’s frequent mentions of a decline.
But that’s not what bothers me about Goldman Sachs and their chief equity strategist. I think most of you already know my feelings about directional calls made by the financial industry. Basically, it doesn’t matter if you are a monkey or professional analyst – the chance of you being right is 50%. The market is either going up or down.
I am bothered by the fact that Goldman is now using the fiscal cliff as a fear tactic to turn over clients’ accounts, thereby costing them money.
Why would Goldman deliver that message? Well, they have one purpose in mind – to scare individual investors into thinking that they are not capable of managing their own money during the decline. So they will give Goldman the opportunity to manage their money.
To me this is an absolute scam.
You can’t direct investors to do something with a statistical chance of 20% unless you have another motive … getting managed accounts.
And anyway, the last time I checked, a 12% decline is considered a normal correction from record highs. In fact, while on the outer fringe, most financial professionals would consider a 20% decline a correction.
See for yourself what the market is saying.
Once again, it’s all about marketing, not the best interest of the individual investor. If they truly had their clients’ best interest, they would have not made it into a public relations move.
But this is how it works on Wall Street. And it’s to the detriment of investors.
I find it odd that professionals never say, “I think the market is going to 1,250 and it has a 20% chance of happening.” If they did, the world of investing would be a better place because peddling fear would not be as prevalent.
This is why I love using options. This is why I teach individual investors how to use risk-defined options strategies that prepare them for potential corrections in the market. You don’t have to liquidate your portfolio and pay overpriced management fees to use simple options strategies that will protect your portfolio. You just have to take some time to learn a few simple strategies that will help protect your hard-earned money.