Goldman cautions about how quickly market confidence has rebounded after a slump in stocks in August

The rapid recovery in market confidence following a dramatic global sell-off in risky assets should be seen as cause for concern, according to the head of asset allocation research at Goldman Sachs.

Speaking on CNBC’s “Squawk Box Europe” on Wednesday, Goldman’s Christian Mueller-Glissmann said investors may view the stock’s decline since early August as something of a “warning shot.”

Stock markets started the month under intense pressure as worries about a possible US recession and the relaunch of popular Japanese yen “trades” pulled stocks from record highs. The S&P 500 lost 3% on Aug. 5, its biggest one-day decline since 2022.

Since then, however, expectations of an imminent interest rate cut by the Federal Reserve and improving US economic data have pushed stocks higher. The S&P 500 is up 8% since August 5, while the Dow Jones Industrial Average is up more than 6%.

“Going into it, you had about a month or two where the positioning and sentiment was at the higher end of the range. People were optimistic,” Mueller-Glissmann said.

“We were actually worried about a little bit of a correction because at the same time, while you had a bullish stance, the macro momentum was a little bit weaker. You had negative macroeconomic surprises in the US about a month and a half before we saw the macroeconomic surprises in Europe and China turn negative as well,” he added.

“What’s worrying now is how quickly the market has bounced back to where we were before … but it certainly shows that unfortunately we’re almost back to the same problem we were in a month ago “.

Market participants are currently awaiting the release of a key US inflation report to get a better picture of the health of the world’s largest economy. Price data on US personal consumption expenditures, the Federal Reserve’s preferred gauge of inflation, is scheduled for release on Friday.

It comes after Fed Chairman Jerome Powell said late last week that “the time has come for policy to adjust,” bolstering expectations for a rate cut at the central bank’s Sept. 18 meeting. Powell declined to give an exact indication of the timing or extent of the cut.

Asked where that leaves risk appetite for the coming months, Mueller-Glissmann said: “What happened on and around August 5 there was obviously a huge technical reaction … so it was a buying opportunity.”

He said the current challenge for market participants is that stocks and risk assets have “completely reversed” losses to get back to where they were before.

“What I find quite interesting is that risk appetite hasn’t gone back to where it was before, and what’s actually happened is that safe assets – bonds, gold, yen, Swiss francs – haven’t sold off fact,” said Mueller-Glissmann.

“What I would say is that the good news is that while the S&P is back to where we were before, complacency is not. We are not at the same kind of extremely optimistic feeling and positioning”.

Mueller-Glissmann, who previously advocated a 60/40 portfolio, noted that a balanced portfolio performed “phenomenally” during a turbulent month for the markets. However, he cautioned that the recent buffer provided by bond markets may not be as reliable in the near term.

“If you think about it, the bond market buffered most of the drawdown. If you look at the 60/40 portfolio, it was a problem. The maximum drawdown was, I think, 2% for the balanced US or European portfolio. So, in other words, the bond market has balanced equity as we hoped it would,” Mueller-Glissmann said.

“I would say, given that you don’t have that much buffer from bonds right now, tactically, you might want to be a little bit careful on the risk portion, especially after this run,” he continued.

“There are different ways to deal with this, you either cut it a little bit … or you can create alternative diversifiers, it could be liquid alternatives, it could be option overlays, things like that.”

— CNBC’s Lisa Kailai Han and Brian Evans contributed to this report.