Goldman Sachs is encouraging investors to buy stocks amid the economic meltdown as the bank predicts a V-shaped recovery.
Despite awful economic data, stocks have recovered in the past month as governments develop plans to ease shutdowns. The Dow Jones is up 30% from its March 23 close but remains 18% off from February’s peak.
Goldman thinks that investors will keep buying U.S. stocks despite one or two seasons of dismal profits and the worst economic downturn since the Great Depression.
The Wall Street bank came to this conclusion after conducting a historical analysis that suggests stocks price in macroeconomic performance over a two-year horizon. If the economy rebounds after the current and coming period of pain, as Goldman expects, stocks don’t need to fall.
Zach Pandl, co-head of global FX and EM strategy, wrote in a research note:
Investors usually discount at least the next two years of macroeconomic performance, suggesting markets may continue to look through bad news over the near term if it can reasonably be expected to reverse in the coming quarters.
Goldman’s analysis used consensus GDP forecasts as a guide. In early April, U.S. GDP was expected to drop by 4%, with an expansion of about 4% for 2021 and 3% for 2022. According to Pandl, this is an unusual pattern for a recession. Economists generally downgrade expectations for the coming years as well as those for the current year.
But not all strategists think that the economic recovery will be in a V-shape like Goldman. The economic shock might be very profound and last very long.
Morgan Stanley CEO James Gorman thinks that the coronavirus-led global recession could last through 2021 and that the best-case scenario is a U-shaped recovery.
Renowned emerging market investor Mark Mobius believes the U.S. economy faces a “W-shaped” recovery, with two dips and two periods of recovery. He thinks it’s unlikely investors will ignore bad economic news. Much of the damage to sales and profitability has not been realized yet. Profits could be worse than currently modeled.
Freezing an economy doesn’t take long, but unfreezing it will take much longer. Many parts of the economy are interconnected, so it may pose problems to reopen gradually.
And if states reopen their economies too quickly, it could lead to a new outbreak, with disastrous consequences for both public health and the economy. This could lead to an economic depression.
The biggest risk is that you open too fast, too broadly, and you have another round of infections, a second wave. That’s the fodder for an economic depression. That would just completely undermine confidence.
Americans aren’t ready for the economy to reopen. It will likely take months or even years before Americans crowd again into restaurants and subways as they did before the pandemic.
To return to the pre-crisis level of business, we need a therapeutic solution or a vaccine, which could take years. Until then, the economy will run well below capacity. Companies that rely on large crowds, like restaurants and retailers, might be forced to close for good as they won’t be able to go on at a reduced capacity.
Weekly jobless claims soared to 26 million in just over a month. Many laid-off workers might not be able to get their old job back.
When investors realize the severity of the economic meltdown, they will probably start selling stocks again. The real stock market crash might not even have begun yet.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment advice from CCN.com.
This article was edited by Sam Bourgi.