Client Call: Market Volatility and Potential Economic Impacts

Episode Summary

Executive Summary: Goldman Sachs leaders assessed COVID-19’s market and economic impact, arguing the banking system is far stronger than in 2008 and is helping transmit policy support into credit markets. They expect a deep, sudden Q2 recession followed by a strong second-half rebound, though equity and lower-quality credit may face more downside before recovery.

Main Topics: Banking system resilience and role in recovery (Priority: 5/5): John Waldron argued the banking system entered the crisis well capitalized, with much higher tier 1 capital and loss-absorbing capacity than in 2008, and is now functioning as a transmission mechanism for policy support. Market functioning and credit-market repair (Priority: 5/5): Speakers highlighted stabilization in commercial paper, investment-grade issuance, and discount-window usage, emphasizing that liquidity and central bank backstops were restoring market function even while stress remained in lower-quality credit. Economic outlook: sharp Q2 contraction, later rebound (Priority: 5/5): Jan Hatsius forecast a very deep but likely short global recession, with unprecedented Q2 GDP declines and a substantial recovery in the second half of 2020 if infection rates recede and lockdowns ease. Equity-market volatility and valuation risk (Priority: 4/5): Peter Oppenheimer described the equity selloff as historically fast and volatile, with profit and dividend cuts likely still ahead and valuations not yet fully reflecting the coming earnings hit. Policy response: Fed and fiscal stimulus (Priority: 5/5): The panel praised the speed and scale of monetary and fiscal actions, noting that the CARES Act and Fed facilities were aimed at replacing income, preventing systemic stress, and supporting market liquidity. Supply-chain restructuring and strategic shifts (Priority: 3/5): John Waldron said COVID-19 and prior trade tensions are prompting companies to rethink overly concentrated supply chains and consider more diversification and national-security considerations. Capital markets reopening and liquidity as priority (Priority: 4/5): Susie Scher emphasized that liquidity is the central issue, especially in investment-grade debt markets, where issuance surged as issuers sought funding and investors demanded high-quality exposure.

Key Arguments: The crisis began as a real-economy and corporate demand shock, not a banking crisis, so banks are being used to help heal the economy rather than absorb a solvency shock. U.S. and global banks have materially stronger capital and leverage positions than in 2008, with tier 1 capital up more than 75% from pre-crisis levels. Fed intervention in commercial paper, money markets, corporate bonds, and discount-window usage was crucial in stopping funding-market dysfunction and restoring confidence. The fiscal package was large and well targeted, but likely still a down payment on more support needed if the output hole proves larger than expected. The economy is likely to show a sudden stop in face-to-face sectors rather than uniform contraction, making Q2 losses extraordinarily large but potentially temporary. Employment data, especially weekly jobless claims, will be one of the best near-term indicators because of its timeliness and lack of statistical assumptions. Equity markets may have rallied on technical factors and policy hope, but earnings, dividends, and defaults still face significant pressure. Companies are likely to diversify supply chains away from excessive concentration, especially in China-linked production, and incorporate national-security concerns. Investment-grade markets are healing first because of higher quality, stronger balance sheets, and active central-bank support; riskier markets remain under stress. Liquidity is the overriding priority for corporates and investors, and public markets are reopening first for the strongest issuers.

Data Points: Global real GDP growth forecast for 2020: -1.8% - Jan Hatsius described this as a deep but hopefully short global recession. U.S. Q2 2020 GDP growth forecast (annualized q/q): -34% - Jan Hatsius said this reflects an unprecedented sudden stop in activity. U.S. GDP drop from January to April: About -13% - Jan Hatsius used this to illustrate the scale of the near-term contraction. U.S. initial jobless claims last week: 3.3 million - Jan Hatsius cited this as a record, about five times previous highs. U.S. initial jobless claims this week estimate: A little over 5 million - Jan Hatsius said claims data would likely worsen as backlogs clear. Share of labor force implied by two weeks of claims: About 6% - Jan Hatsius highlighted the speed of labor-market deterioration. Projected U.S. unemployment rate: About 15% - Jan Hatsius said layoffs could push unemployment to a postwar high. U.S. tier 1 capital increase since pre-crisis: Over 75% - John Waldron used this to show banking-system resilience. U.S. tier 1 capital before crisis: About $1 trillion - John Waldron referenced second-quarter 2008 levels. U.S. tier 1 capital by Q4 2019: North of $1.7 trillion - John Waldron contrasted this with pre-crisis levels. Incremental excess capital capacity on leverage requirements: About $250 billion - John Waldron cited industry-wide leverage capacity. Investment-grade issuance last week: $110 billion - John Waldron used this as evidence that term credit markets were healing. Investment-grade issuance on Monday: $36 billion - John Waldron noted continued reopening of the market. Likely issuance today: About $10 billion - John Waldron provided a same-day estimate. Investment-grade issuance over the last month: $250 billion - John Waldron said this was effectively record level issuance. Equity fund outflows last week: $26 billion - John Waldron said this was the largest since December 2018. S&P 500 one-day drop: -12% - John Waldron cited the largest one-day decline since 1987. S&P 500 one-day surge: +9.4% - John Waldron cited the largest one-day gain since 2008. U.S. CARES Act total size: Over $2 trillion - John Waldron described the fiscal response as massive relative to GDP. Small-business support in stimulus: $380 billion - John Waldron said this would largely be executed through SBA facilities. Emergency Stabilization Fund / ESF: $500 billion - John Waldron said this would backstop markets and corporations via Treasury/Fed coordination. Direct payments to individuals: $250 billion - John Waldron described $1,200 per adult and $500 per child payments. Unemployment insurance expansion: $250 billion - John Waldron listed this as a major fiscal support component. U.S. nominal GDP hit from virus in 2020: A little over $1 trillion - Jan Hatsius used this to frame income loss from social distancing. Gap versus long-term nominal GDP trend: Just under $2 trillion - Jan Hatsius said this is the income hole fiscal policy aims to fill. S&P 500 earnings per share forecast for 2020: -33% - Peter Oppenheimer said markets may not fully price this downside. European earnings per share forecast for 2020: -45% - Peter Oppenheimer described this as well below consensus. European forward P/E: Around 12x - Peter Oppenheimer said this was above typical trough valuations. European bear-market trough P/E in past crises: About 6x to 8x - Peter Oppenheimer compared current valuations with 2008 and 2011 lows. U.S. dividends expected decline: -38% over next nine months - Peter Oppenheimer said payouts face major pressure. U.S. dividends vs. 2019 on a four-quarter basis: 25% below 2019 - Peter Oppenheimer projected a prolonged dividend hit. Private and public market rebound in equity markets: Earnings up over 50% next year from trough - Peter Oppenheimer said this is consistent with a V-shaped recovery. March investment-grade market volume: Biggest month ever - Susie Scher emphasized unprecedented debt-market activity.

Pivotal Quotes: "This crisis we're living in now is really began as more of a real economy crisis, almost a corporate crisis... more of a demand shock in the real economy." — John Waldron: Explaining why this downturn differs from 2008 and why banks are healthier entering it. "Our forecast is a deep but hopefully fairly short global recession." — Jan Hatsius: Summarizing Goldman Sachs’ macroeconomic outlook. "My advice to you all in the middle of this crisis is one word, and that's liquidity." — Susie Scher: Capturing the core capital-markets message amid the market stress.

Implications: Expect severe near-term economic damage, especially in labor markets and lower-quality credit, but also continued policy support, market repair, and a likely recovery later in 2020. For corporates, liquidity management and supply-chain diversification are critical.