These 2 Grave Dangers Could Cripple U.S. Stock Market Recovery

April 13, 2020 4:44 PM UTC
The U.S. stock market has rebounded 25% off its March lows, but the rally is anything but sustainable if these two Wall Street projections come true.
  • The S&P 500 Index has recovered nearly 25% from its March low, but the rebound is on shaky grounds if Wall Street’s grim projections come true.
  • Morgan Stanley told clients “the path to re-opening the economy is going to be long.”
  • Goldman Sachs, meanwhile, warned investors against buying stocks that are recipients of government assistance.

The Dow and broader U.S. stock market declined sharply on Monday, as investors returned from the Easter long weekend only to find conflicting information about the nation’s path to restarting the economy.

Now, two of Wall Street’s biggest banks have warned that it could take months for economic activity to rebound and that stocks receiving government assistance will soon find themselves lagging the broader market.

Morgan Stanley: U.S. Economy Will Continue to Languish Under COVID-19

Morgan Stanley has warned that the U.S. economy will face some kind of disruption until at least March 2021 when a potential coronavirus vaccine becomes broadly available.

Biotechnology analyst Matthew Harrison said that while the East and West coast epicenters will see a peak in new cases this month, it won’t be until May before new cases peak nationally.

Harrison believes the country will return to work in two waves — first in June and then in mid-summer — before schools reopen in September. But he did warn that second-wave infections are possible next winter.

In a note to clients (as per CNBC), Harrison said:

We believe the path to re-opening the economy is going to be long… It will require turning on and off various forms of social distancing and will only come to an end when vaccines are available, in the spring of 2021 at the earliest.

The United States is the largest center for coronavirus infections — that is, if Chinese data about containment are to be believed — with more than 557,000 confirmed cases.

U.S. coronavirus hot spots include New York, New Jersey and Michigan. | Image: Johns Hopkins

Analysts across Wall Street have called for a painful recession as GDP contracts by up to 24% in the second quarter alone. The stock-market recovery has been largely underpinned by expectations that the economy will see a quick ‘V-shaped’ recovery in the latter part of the year.

Investors betting on a quick rebound could be in for disappointment, according to Citigroup, which recently warned of a possible ‘L-shaped’ recovery that could take years to play out. The bank says a ‘U-shaped’ path was more likely as the economy slowly recovers.

Goldman Sachs: Beware of Stocks Receiving Government Assistance

Despite revising its outlook on the U.S. stock market, Goldman Sachs is warning investors against buying companies receiving government relief aid.

Goldman equity strategists Arjun Menon and David Kostin told clients that government assistance props up stock values in the short term, but that the gains are not sustainable.

Historically, companies receiving government support usually underperform the broader market over the next 12 months. Typically, the underperformance begins after three months.

In a note published on Wednesday, the analysts wrote:

The share prices of recipients of government relief have generally lagged the S&P 500 in the subsequent 12 months… Although companies and industries have generally witnessed a brief rally immediately following government relief, the outperformance has not usually persisted over a longer-term horizon.

President Trump signs historic stimulus bill into law on Mar. 27:

Although Goldman didn’t specify which companies are most vulnerable to a pullback, the warning applies to a large swathe of the stock market that’s eligible for federal assistance. The government’s $2.2 trillion CARES Act includes $500 billion in appropriations for struggling businesses, $377 billion in loans and grants for small companies and $150 billion for local and state governments.

Some of the hardest hit industries — like commercial cruise lines — don’t qualify for bailouts because they aren’t domiciled in the United States. (In other words, they exploited loopholes in maritime law to register their ships overseas and dodge taxes.) Some of these companies, including Carnival Cruise, might not survive the corona crisis.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

Josiah Wilmoth edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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Financial Editor of CCN.com, Sam Bourgi has spent the past decade focused on economics, markets, and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE, Yahoo Finance, and Forbes. Sam is based in Ontario, Canada and can be contacted at sam.bourgi@ccn.com or at LinkedIn. Visit his Muck Rack profile here. Sam Bourgi is a Trusted Journalist.