Goldman Sachs and Morgan Stanley warn of potential 20% market decline

Two major Wall Street firms told investors on Tuesday to prepare for a potential drop in stock prices over the next couple of years, even as markets around the world continue to reach new heights.

Speaking at an investment conference in Hong Kong, the chief executives of Goldman Sachs and Morgan Stanley said they expect markets to pull back at some point soon, though they emphasized such drops are a regular part of investing.

Stock markets across the globe have been climbing higher throughout this year. Investors have been excited about artificial intelligence technology and hoped central banks would lower interest rates. In recent weeks, major American stock indexes have reached all-time highs. Japan’s Nikkei 225 and South Korea’s Kospi have also set new records. In China, the Shanghai Composite has climbed to its best level in ten years, helped by improving relations between Washington and Beijing and a weaker U.S. dollar.

David Solomon, who leads Goldman Sachs, told attendees at the Global Financial Leaders’ Investment Summit that markets will probably fall between 10 to 20% sometime in the next 12 to 24 months.

“Things run, and then they pull back so people can reassess,” Solomon said as quoted by CNBC.

Not a cause for alarm, executives say

But Solomon made clear that such drops should not worry long-term investors. He said Goldman Sachs continues to tell its clients to keep their money in the market and review how their investments are spread out, rather than trying to guess when prices will rise or fall.

“A 10 to 15% drawdown happens often, even through positive market cycles,” he explained. “It’s not something that changes your fundamental, your structural belief as to how you want to allocate capital.”

Ted Pick, the head of Morgan Stanley, shared similar thoughts during the same discussion. He said investors should actually see temporary declines as a good thing, not a warning sign of trouble ahead.

“We should also welcome the possibility that there would be drawdowns, 10 to 15% drawdowns that are not driven by some sort of macro cliff effect,” Pick said.

The two executives are not alone in their concerns. The International Monetary Fund recently warned that markets could experience a sudden sharp drop. Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey have also raised concerns about stock prices being too high.

Asian markets show promise

Despite these warnings about a possible pullback, both Goldman Sachs and Morgan Stanley see good opportunities in Asian markets over the coming years. They pointed to recent positive changes, including the trade agreement between the United States and China.

Solomon said Goldman Sachs believes investors worldwide will keep putting money into China, calling it one of the “largest and most important economies” globally.

Pick said Morgan Stanley feels positive about Hong Kong, China, Japan and India because each has its own unique story of economic growth. He specifically mentioned Japan’s efforts to improve how companies are run and India’s major spending on infrastructure as investment opportunities that could play out over several years.

“It’s hard not to be excited about Hong Kong, China, Japan and India — three vastly different narratives, but all part of a global Asia story,” Pick said. He particularly highlighted China’s artificial intelligence, electric vehicle and biotechnology industries as areas worth watching.