US investment bank Goldman Sachs (NYSE:GS) has said that it expects stock markets to fully recover from the coronavirus shock in the second half of this year. In a call with US fund managers recently, the bank forecast that the world would reach ‘peak virus’ within the next eight weeks, declining thereafter.
Goldman Sachs painted a bleak picture for the next few months but was more upbeat for the summer. It forecast global economic growth at approximately 2%, which would make this the worst year for the global economy in the last three decades. The S&P 500 is expected to see negative growth of between -15% and -20% for the year.
It confirmed that China’s economy has suffered badly and that we will see knock on effects on global supply chains which could take up to six months to recover from.
Goldman Sachs: real damage from market psychology
While there is going to be damage from the virus itself – Goldmans predicted as many as 3 million deaths in the US, although it also added some of these fatalities had to be conflated with other sources (e.g. seasonal attrition from flu among the elderly) – the real economic damage is being driven mainly by market psychology.
The bank said that we were at the end of the longest equity bull run in history and that the market had been looking for a reason to re-adjust itself. Economists and analysts have been seeking a possible source for this for months, but have been largely restricting themselves to the credit markets and financial system and not looking further afield – e.g. from a ‘black swan’ event.
No specific dangers from systemic risk
Goldmans reassuringly noted that it did not see any specific danger in terms of systemic risks at the moment. Governments are intervening in the markets and the private banking sector looks very well capitalized. According to one fund manager on the call, “it feels more like 9/11 than 2008.”
The call also addressed the issue of the oil markets, where the oil price has been spectacularly driven down by a price war between Saudi Arabia and Russia. Goldman Sachs accepted that the low oil price would be good news for industrial economies, but would have implications for valuations within the domestic US energy sector, as the US is now a net oil exporter.
According to analysis carried out by The Armchair Trader, shale oil producers in the US really need the oil price to be above at least $50-54/bbl to break even, sometimes higher depending on location within the US. The oil price is currently a long way from there.
Goldmans said it believed the Russians were seeking to squeeze US shale producers and that Saudi Arabia is really caught in the middle and is being squeezed itself as it tries to protect its own market share.