Investors have entered a difficult period of tightening financial conditions, slowing economic growth and elevated market volatility, but some stocks could still thrive in such challenging times, according to Goldman Sachs. The Wall Street firm is recommending stocks with a high Sharpe ratio score, a measure of a stock’s performance relative to its volatility. Goldman uses consensus price targets and options’ six-month implied volatility to measure Sharpe ratios. “As markets digest the potential path of monetary policy and the impact of slowing growth, investors should own stable stocks,” wrote David Kostin, Goldman’s head of U.S. equity strategy. “Our High Sharpe Ratio basket … takes volatility into account, but maximizes prospective risk-adjusted returns. The strategy has a high hit rate of outperformance.” Goldman’s high Sharpe ratio basket consists of 50 S & P 500 stocks with the highest prospective Sharpe ratios. It has a long track record of beating the market: The basket has outperformed the S & P 500 in 64% of all six-month periods since 1999 by an average of 257 basis points, the bank said. These stocks could be a good place to hide out as volatility dominates Wall Street on fears that the Federal Reserve will hike rates aggressively to stifle inflation, even at the risk of causing an economic downturn. The S & P 500 dropped 5.8% last week, its biggest weekly loss since March 2020. The median basket constituent generates a risk-adjusted return that is double that of the median S & P 500 stock, Goldman said. The basket contains a couple of Covid-19 “reopening” stocks, including Alaska Air , Royal Caribbean and Carnival. Disney, Bank of America and Walmart were also included in the portfolio.
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