The US bond market is sounding recession alarms with approximately 130 basis points of rate cuts priced into interest-rate derivatives for the coming year, according to recent reports. Goldman Sachs suggests this pace of monetary-policy easing looks more like “recession cuts” than mere adjustments for slower inflation. However, despite recession-warning indicators like an inverted yield curve persisting for over a year, Goldman Sachs economists, along with investors in risky markets, don’t foresee a downturn in 2023.

While the Nasdaq Composite has surged 13% from its late-October low, and cyclical stocks have caught up with their defensive counterparts, the narrowing yield gap between the junk-bond market and Treasuries indicates that risky markets are responding to the anticipation of recession-speed rate cuts rather than an imminent economic downturn.

Goldman Sachs, while acknowledging the weak manufacturing surveys, believes that a substantial economic slowdown would be necessary for the Federal Reserve to cut rates more than 75 basis points. This presents a challenge to a sustained positive outlook for markets, as the bank highlights two crucial factors: valuation concerns and the potential reluctance of the Fed to cut rates swiftly in light of their more optimistic view on US growth.

The f”cus on these challenges suggests increased vulnerability in the market, making it prone to setbacks. While the bank is not adopting a bearish stance, it advises investors against impulsive moves into high-risk assets like cryptocurrencies, Bitcoin, or certain stocks. Instead, Goldman Sachs recommends considering hedging strategies and taking advantage of low equity volatility levels to add hedges, enabling investors to maintain a long position or add risk during market pullbacks.

As economic uncertainties persist, Goldman Sachs emphasizes the need for a cautious approach, encouraging investors to navigate current market conditions with a strategic and risk-conscious mindset.