One of the most bizarre developments to come out of the COVID-19 stock market crash was banks’ increasingly bearish economic forecasts. As news about the virus got worse, the banks got increasingly panicky, seeing disaster at every turn. Recently, a major U.S. bank predicted a whopping 38% Q2 contraction, while a St. Louis fed official said -50% was possible.
One of the banks leading the “doom and gloom” chorus was Goldman Sachs (NYSE:GS). Starting off the year by predicting 0% corporate earnings growth, they went on to predict a 24% Q2 GDP contraction and an S&P 500 slide to 2,000. More recently, they forecast Q2 GDP to drop 11% year over year and 34% sequentially. By Goldman’s own admission, these forecasts were based on anecdotal evidence. Q2’s numbers will be influenced by unpredictable factors like lockdown duration, making forecasts for the quarter inherently unreliable.
That’s not to say they won’t come to pass. Unemployment numbers are actually worse than expected, and earnings from certain industries (e.g. airlines and hotels) will probably be, too. If these trends persist, then the U.S. could actually hit Goldman’s Q2 projections.
However, sentiment has undeniably taken a positive turn in the past few weeks. Stocks are rising, and talk of re-opening the economy is becoming more common. Investors are beginning to sense value in beaten-down sectors, sending airline stocks soaring. Now, Goldman itself is beginning to sound bullish — at least on stocks. In a highly publicized note, a GS team led by David Kostin said that a near-term S&P 500 slide to 2,000 was no longer likely. Citing “unprecedented policy support,” the team argued that stocks probably wouldn’t test recent bottoms any time soon.
Why Goldman changed course
Goldman’s bullish (or at least “not bearish”) forecast was based on two factors: policy support and long-term economic trends. Policy support came in the form of unprecedented fiscal and monetary stimulus, including bailouts and rate cuts. The long-term economic trend cited is the tendency of stocks to behave as a “leading indicator,” peaking or bottoming before the underlying GDP trend does. These two factors together suggested to Goldman analysts that the bottom for stocks was reached in March.
What this means for Canadian investors
For Canadian investors, Goldman’s forecast could mean that it’s time get into stocks. The U.S. is Canada’s largest export partner, and any recovery in the U.S. will be good news for Canada.
More specifically, there’s reason for optimism toward beaten down sectors like airlines. The larger airlines like Air Canada have major problems to deal with, but not all airlines are in the same boat. Those that aren’t could be great buys.
Take CargoJet (TSX:CJT) for example. As a cargo airline, its operations won’t falter because of COVID-19. Shipping goods is an essential service, so CJT can keep flying for the foreseeable future. This makes CJT more similar to a CN Railway than an Air Canada.
Not only is CargoJet surviving, it seems to be thriving. Recently, it put out a press release saying say it was experiencing higher than normal shipping volume. The reason for the increase was a surge in e-commerce shipments. This suggests that the company could bounce back dramatically from its COVID-19 losses, since its business isn’t affected by the ongoing closures.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Andrew Button owns shares of Canadian National Railway. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway and CARGOJET INC. The Motley Fool recommends Canadian National Railway.