Goldman on rising Fed tightening risk

From Goldman as we approach the FOMC meet this week:

Earlier in the week commodity prices, and specifically crude oil, caused violent swings in market momentum that has dominated investor focus. After rising by 31% in 2015, our momentum factor (ticker: GSMEFMOM) has declined by 5% YTD, with its volatility leaping to the highest levels since 2009. This month alone the factor has experienced daily returns falling in the 2nd percentile (-3%) and 99th percentile (+5%) since 1980. Energy firms currently account for 25% of the factor’s short leg. Since bottoming at $26 on February 11, WTI crude has risen by $12 (44%) and driven the S&P 500 Energy sector to outperform the broad market by 265 bp (12% vs. 9%).

The correlation between major macro trends has caught many popular investment themes in the momentum spin cycle. In 2015 and the first weeks of this year, lower oil prices were accompanied by lower Treasury yields and downward revisions to US growth expectations, boosting the performance of popular growth stocks and defensive equities while weighing on banks. At the same time, the US dollar, which carries a strong negative correlation with oil, strengthened by nearly 15% and presented another headwind to the US economy. The combination of growth concerns and low oil prices widened credit spreads to recessionary levels and benefitted the performance of stocks with strong balance sheets. All of these trends have reversed sharply in recent weeks (see Exhibits 1 and 2).