In what comes as a very important announcement right now, Goldman Sachs argues that the stock market has not bottomed, and that it will take three things happening for the nadir to arrive. In order for markets to reach a bottom and start to sustainably rise, Goldman says case numbers must start to fall, there must be evidence that Fed and Congressional efforts are sufficient to support the economy, and investor sentiment and market positioning must bottom out (which has not even close to happened yet, according to GS). Goldman expects the S&P 500 to finish the year at 3,000.
FINSUM: We agree with the first two points (about case numbers and stimulus), but the third argument about positioning seems circular to us, as it relies on the markets getting worse before getting better.
Income investors have been frightened by the extent to which the current Coronavirus downturn is going to cause an economic downturn and thus a big cut to dividends. The only good news on this front recently has been that companies are suspending buybacks before dividends. In assessing the damage, Goldman Sachs says overall dividend payouts are going to be slashed by 25% this year. That figure includes a 38% fall for the next nine months added to the 9% rise in dividends in the first quarter.
FINSUM: This is big, but it would be far from catastrophic levels.
The epicenter of the financial crisis accompanying the Coronavirus pandemic has undoubtedly become the commercial real estate space. With so many physical businesses bringing in zero revenue, the huge suspension of cash payments is going to flow through to property owners and then to the lenders that financed those building purchases. Multiple parts of that value chain are going to targeted by markets, but Wells Fargo, in particular, looks exposed. The bank has almost 13% of mortgage market share (residential), around double the exposure of JPMorgan Chase and triple that of Bank of America.
FINSUM: The government’s stimulus package offers some good assistance to help support cash flow (via Ginnie Mae), which could soften the blow. But still, it is going to be a painful period.
Morgan Stanley was due to make some big pay changes for advisors starting April 1st. The changes would mean a reduction in compensation for similar production levels. However, in light of the Coronavirus outbreak, the firm has said it is pushing the implementation date for the changes back to October 1st. Directly addressing the firms 15,000+ advisors, the head of field management said “We know that you are facing enormous challenges personally and professionally while at the same time taking great care of your clients in a very difficult environment”.
FINSUM: These changes are tough to begin with, and doing them right now would have been downright draconian (and might have caused some extra departures).
All the predictions in the market are about how steep the recession in Q2 will be (we think people should also be considering the Q1 numbers!), but a new paper has been published looking back at the economic effects of the 1918 pandemic. The surprising finding is that strong shutdowns did not actually hurt the economy as much as thought. In fact, the areas that undertook the strongest and swiftest shutdowns, had the weakest drops in output and the quickest recoveries. The average US location suffered an 18% downturn from the pandemic. However, the researchers (two from the Fed, one from MIT) summed up their findings this way, saying “Cities that implemented more rapid and forceful non-pharmaceutical health interventions do not experience worse downturns … In contrast, evidence on manufacturing activity and bank assets suggests that the economy performed better in areas with more aggressive NPIs after the pandemic”.
FINSUM: While this is not the most compelling evidence (given it is 100 years old), it is encouraging to consider that those taking swift action might not see the worst consequences.