Why Goldman Sachs’ Stock Will More Than Make Up For The Recent Decline Post Coronavirus Crisis

Goldman Sachs’ (NYSE: GS) stock declined by about 20% between 8th March 2020 and 24th March 2020 (vs. an 18% decline in the S&P 500), and the stock is down almost 35% since 31st January after the WHO declared a global health emergency in light of the coronavirus spread (vs. about 27% decline in the S&P 500 since then). Drawing lessons from the 2008 financial crisis, we see GS stock declined from levels of around $189 in October 2007 (the pre-crisis peak) to levels of about $78 in March 2009 (as the markets bottomed out) – implying GS stock lost as much as 59% from its approximate pre-crisis peak. This marked a sharper drop than the broader S&P, which fell by as much as 51%. The premier investment bank’s stock has tracked the S&P 500 this time around too, and the recovery could very well be along the lines of what was seen a decade ago.

Will Goldman Sachs’ stock recover similarly from the coronavirus spread?

• We compare the performance of Goldman Sachs vis-à-vis the S&P 500 in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did Goldman Sachs Stock Fare Compared With S&P 500?
• In fact, Goldman Sachs recovered strongly post the 2008 crisis to levels of about $146 in early 2010, rising by 87% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.
• A similar trend now could mean Goldman’s stock partially recovering to pre-coronavirus levels around $180, or over 30% from here.

Overall, there have been two distinct trends driving the recent sell-off. Firstly, the increasing number of Coronavirus cases outside China is causing mounting concerns of a global economic slowdown. Secondly, crude oil prices plummeted by more than 20% after Saudi Arabia increased production.

The effect is also evident in Goldman’s stock as individuals and businesses are not spending due to economic uncertainty. The bank has a sizable loan portfolio of over $110 billion (as per 2019 data), which could see sizable losses if individuals, as well as businesses, default on their loan payments due to slowdown. Further, as the economic condition deteriorates, it would become expensive for the bank to attract funding, negatively impacting all its operations. Similarly, lower market activity would mean a drop in investment banking as well as capital raising deals – resulting in a decline in advisory & underwriting fees.

However, the bank could profit due to its significant presence in the sales & trading business. The company generated around 40% of its revenues from its sales & trading business in 2019. Given the extreme level of volatility in equity & debt markets over recent weeks, Goldman Sachs is well-positioned to report strong results for its securities trading arm, which should help mitigate the negative impact of weak economic conditions on its other operating segments. We believe Goldman’s Q1 and Q2 results will confirm this reality with a drop in both interest income and investment banking revenues, partially offset by growth in sales & trading. If signs of coronavirus containment aren’t clear by the April Q1 earnings time-frame, its likely Goldman’s stock along with the broader market is going to see a continued drop as investors come to terms with the situation around them.

What about timing?

Potential for say 30% gains in GS stock, (as it has only fallen a fraction of what it did in the last crisis and therefore should rebound less) and its timing, hinges on the broader containment of the coronavirus spread – our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of Coronavirus’s impact on a diverse set of Goldman’s multinational peers – from Coronavirus and Capital One to impact on competitor Morgan Stanley. The complete set of coronavirus impact and timing analyses is available here.

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