Is Goldman's "Hope" Fading?

While the ring was pulled rightly, and the Merton' s dividend yield provides some comfort so far, the question about depth of correction remains.

The conventional wisdom of equity markets was nicely described by the analysts at Goldman Sachs last week:

Most earnings growth is not paid for when it occurs during the Growth phase, but when it is correctly anticipated during the Hope phase, and when investors get overly optimistic about the future growth potential during the Optimism phase. The Growth phase sees the highest rate of earnings growth, but the second lowest rate of return over the cycle.

The phases are related to the economy. Generally, the Despair phase is associated with a recession. The output gap troughs and the unemployment rate peaks during the Hope phase, while the Growth phase sees sharp improvements in both variables. Investors’ real required return rises during the Despair and Growth phases and falls during the Hope and Optimism phases.

Click on picture to enlarge the graphical depiction, courtesy of Goldman Sachs.

The question now remains - is the "Hope" already over?

While looking at Western markets and applying the "conventional wisdom" of Goldman Sachs, or even the approach of "Triunity Theory", it is not that clear... However, the fading of "Hope" in Asian and Latin American markets appears to be very likely.

The underlying fundamentals and the "damaged technicals" of Dow Jones Transportation Average also questions the "Growth" thesis. On the Asian side of the pond the life is still ticking up...