Goldman Sachs Identifies Attractive Put Options as Hedge Against Growth Risks
In the midst of recent equity market weakness and disappointing July employment figures, investors are turning to Goldman Sachs for advice on hedging against potential growth slowdowns. Goldman Sachs' economists have raised their 12-month recession probability forecast to 25%, citing a rise in the unemployment rate to 4.3% in July 2024.
Despite the increased risk of recession, analysts at Goldman Sachs believe that the overall risk is limited and do not see major financial imbalances. However, they emphasize the importance of hedging against growth risks in the current economic environment.
Goldman Sachs recommends using put options on select stocks and ETFs as a strategic necessity. The volatility index has decreased since its August spike, but both index and single-stock implied volatilities remain high compared to recent history. This presents a challenge in finding cost-effective hedges, but Goldman Sachs has identified opportunities where options prices are relatively low despite high sensitivity to U.S. growth.
KeyCorp, AerCap Holdings NV, and Fifth Third Bancorp are highlighted as attractive put options among individual stocks, while Financials, Consumer Discretionary, and Materials ETFs are recommended as effective hedges in the ETF space. These options are structured to cover upcoming macroeconomic events, including the September and November FOMC meetings, U.S. presidential elections, and key data releases.
Goldman Sachs also addresses specific thematic risks, such as potential drawdowns in mega-cap tech stocks and the impact of rising interest rates. Tactical hedges through put options are recommended for tech stocks trading at stretched valuations and for mitigating rate risks.
Overall, Goldman Sachs has conducted a detailed screening of stocks and ETFs with high sensitivity to U.S. growth, ensuring tradability and relevance in the current economic environment. By strategically using put options on these assets, investors can effectively hedge against potential growth risks and navigate uncertain market conditions with confidence.