Goldman screens for post-selloff stocks with healthy fundamentals at a discount

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Investor attention will shift away from macro following a volatile week, but stock-picking opportunities will remain, according to Goldman Sachs.

Concerns over a weak labor market prompted selling in anticipation of a potential recession, but outside of economic data “crowding, and poor liquidity likely exacerbated market moves this week,” equity strategist David Kostin wrote.

“Investors have focused on the yen carry trade as one source of volatility, and our colleagues in GS Prime Services highlighted large selling of Japanese equities by hedge funds, CTA de-levering, and asset manager futures liquidation as key flows during the sell-off,” Kostin said. “At the same time, equity bid-ask spreads and futures top of book depth have reflected a deterioration in liquidity. Liquidity shocks are typically associated with increased volatility.”

“History suggests that during the next few months both stock correlations and implied volatility will only gradually recede back to ‘normal,'” he added.

There have been 12 other episodes since 2000 when Cyclicals lagged Defensives by more than 5 percentage points within a week, “signaling a sharp increase in economic growth concerns.”

“Like in the past week, these episodes were characterized by large increases in both volatility and correlations,” Kostin said. “Following these scares, on average both realized correlations and implied volatility, as measured by the VIX (VIX), declined slowly and remained well above pre-scare levels even 3 months later.”

“If economic fears continue to fade and the market becomes more micro-driven in coming months, then the recent sell-off represents an attractive opportunity to buy stocks with healthy fundamentals at valuation discounts,” he said.