'All Good Things Must Come To An End': Goldman Sachs Warns Of 'fast Pain' Bear Market

In a note, Christian Mueller-Glissmann, managing director of portfolio strategy and asset allocation at Goldman Sachs International, pointed to the two other occasions when equities, bonds and credit was all similarly expensive: the "Roaring 1920s and the Golden 1950s".

"All good things must come to an end," Mueller-Glissmann said, according to Bloomberg. "There will be a bear market eventually."

He added central banks had fewer options in the current environment to ease monetary policy in the event of recession, due to low interest rates and large balance sheets.

The Federal Reserve has only recently begun reducing its $4.5trn balance sheet, while the European Central Bank added to its €2.5trn balance sheet with purchases of €60bn bonds-a-month, which will be reduced to €30m-a-month in January 2018.

This withdrawal, Mueller-Glissmann said, would push up premiums for investors to hold longer-duration bonds while also predicting returns to be "lower across assets" in the medium-term.

A second, less likely, scenario, which the note said, would result in "fast pain" to stock and bond markets with the trigger being either negative growth or a growth shock coupled with a rise in inflation.

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Furthermore, any increase in interest rates as a result of price pressures was a "key risk" for multi-asset portfolios, the note said.

"Elevated valuations increase the risk of draw-downs for the simple reason that there is less buffer to absorb shocks," Mueller-Glissmann said.

"The average valuation percentile across equity, bonds and credit in the US is 90%, an all-time high."

"The worst outcome for 60/40 portfolios is high and rising inflation, which is when both bonds and equities suffer, even outside recessions."