Note: The following is a redacted version of the original report published March 24, 2020 [34 pgs].

Global Macro
Equity ISSUE 87 | March 24, 2020 | 7:00 PM EST
Research
Research

TOPof ROARING INTO

MIND RECESSION
Coronavirus has pushed the global economy into a recession of historic proportions
and halted the longest-lasting equity bull market on record. As infections spread
globally, economic activity collapses, markets recoil and policymakers respond, the
depth and duration of the economic and market downturn is Top of Mind. We speak
with the former Chair of the Council of Economic Advisers, Jason Furman, and GS
Chief Economist, Jan Hatzius. Both agree that the near-term economic damage will
be severe, but whether it proves longer-lasting will depend largely on the virus’
trajectory and somewhat on policymakers, who have done a lot, but may need to
do more to sustain households, businesses and market functioning in this difficult
period. To that end, we assess the risk that the global health crisis becomes a financial crisis. And we discuss how
this might play out in markets, and what investors should do from here. For that, we draw on the wisdom of Oaktree

“
Co-Chairman, Howard Marks. His advice? Buy things with solid fundamentals when they go on sale.

There’s a tremendous amount of uncertainty at this

stage. But I think there’s a reasonable chance we’ll still
see negative growth next year.
- Jason Furman
It doesn't do any good to think about what's going to
happen to the economy, or for how long the stock market
is going to decline or to how low. These things are
unknowable. What really matters is whether price is
proportional to fundamentals. It’s all about value.
- Howard Marks
If you focus on the level [of activity], you might say that
we assume a U-shaped recovery... But if you focus on
WHAT’S INSIDE
INTERVIEWS WITH:
Jason Furman, Professor of Economic Policy, Harvard School of Government
Howard Marks, Co-Founder and Co-Chairman, Oaktree Capital Management
Jan Hatzius, Head of Global Investment Research and Chief Economist,
Goldman Sachs
CORPORATE CREDIT: CYCLICAL AND STRUCTURAL CONCERNS
Lotfi Karoui, GS Credit Strategy Research
CONDITIONS FOR A MARKET TROUGH
Kamakshya Trivedi and Zach Pandl, GS Markets Research
NAVIGATING THE NEW BEAR MARKET
Peter Oppenheimer, GS Equity Strategy Research

lower level.
“
growth rates, you’d probably call our forecast V-shaped...
but whatever growth we get will come from a much

- Jan Hatzius
BANKS: WILL THEY HELP OR HURT?
Richard Ramsden, GS Banks Research
Q&A ON FUNDING STRESSES AND LIQUIDITY
Praveen Korapaty, GS Markets Research
THE CURRENCY OF LAST RESORT
Jeff Currie and Mikhail Sprogis, GS Commodities Research ...AND MORE

Allison Nathan | allison.nathan@gs.com Gabriel Lipton Galbraith | gabe.liptongalbraith@gs.com Jenny Grimberg | jenny.grimberg@gs.com

Investors should consider this report as only a single factor in making their investment decision. For
Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc.

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15 4
10
2
5
0 0
-5
Services Consumption Effects*
-10 Manufacturing Effects** -2
-15 Building Investment Effects***
Fiscal Response to Virus -4
-20
New GS US Forecast Public Sector Demand
-25 -6
Previous Forecast Consumer Spending and Capex
-30 Imports
Q1 Q2 Q3 Q4 Q1 Q2 -8 Exports
2020 2021 Virus Contribution to GDP Growth
* Includes cutbacks to consumption categories requiring face-to-face interaction. -10
** Includes reduced domestic and foreign demand for goods, supply chain disruptions, and plant shutdowns.
*** Includes cutbacks to structures investment, homebuilding, and home sales. Q4
2019Q4 2020Q1 Q2 Q3 Q4

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10 30

20
5
10

0
0
-10
Local Outbreaks
-5 Supply Chain Disruptions -20
External Demand
Total Virus Impact -30
-10 New Baseline
Baseline Pre-COVID-19 -40

-15 -50
Q1 Q2 Q3 Q4 Jan. 2 Jan. 16 Jan. 30 Feb. 13 Feb. 27 Mar. 12 Mar. 26
20.0 Average Average
contraction expansion
1854-2009 (33 cycles) 17 months 38 months

15.0 1854-1919 (16 cycles) 21 months 26 months

1919 - 1954 (6 cycles) 18 months 35 months

1945 - 2009 (11 cycles) 11 months 58 months

10.0

5.0

0.0

1839-1843 1973-75 recession

Post-Napoleonic recession
Depression
Great Recession
-5.0 1865-67 recession
Recession of 1958
Depression of 1808 1882-1885 1981-82 recession
recession We expect the US
economy to
1833-34 recession Panic of 1873 contract by 3.8% in
-10.0 Recession
Panic of 1893 of 1913-14 2020, and
Recession of 1945 unemployment to
reach a 9% peak
US real gdp growth rate, percent yoy Panic of 1907 Great Depression
-15.0
1801 1811 1821 1831 1841 1851 1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011
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 We forecast a 13% rise in HY default rates by year-end
Re-leveraging corporates; deleveraging households 12-month trailing HY default rates, percent
Percent (lhs); ratio (rhs)
20%
Debt/in come for h ousehold s (lhs) Acutal Default Rate
130 Net de bt/EBITDA for me dian IG n on-financial fi rm (rhs) 2.1
18% Downside Forecast
Baseline Forecast
16%
1.9
120
14%

1.7 12%
110
10%
1.5
8%
100
1.3 6%

4%
90
1.1
2%

0%
80 0.9
1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021
199 8 200 1 200 3 200 5 200 7 201 0 201 2 201 4 201 6 201 9
 Illiquidity measures have jumped to GFC levels
Amihud illiquidity score in the IG bond market, 5-day ma, percent

2.0%

1.5%

1.0%

Bigger corp. bond market and smaller dealers’ balance sheets

$tn (lhs); $bn (rhs) 0.5%
$tn $bn Dealers net inventories of
9 40 corporate bonds
0.0%
35 $33bn
8 200 7 200 9 201 1 201 3 201 5 201 7 202 0
30

7 25
20
6 $12bn
15

5 10
5
4 Notional value of the USD
IG and HY markets 0
3 -5
2007 2010 2013 2016 2019 2004 2008 2012 2015 2019
Some front-end funding pressures normalizing on Fed actions
EUR 3M OIS XCCY basis, bp
0

-20

-40

-60

-80

-100

-120

-140

-160
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20
 Non-financial CP spreads have reached '08 levels
3m CP and JPY OIS XCCY, relative to 3m OIS (in basis points)
500
3m Nonfinancial CP
400 JPY OIS XCCY (inverted)

300

200

100

-100
2007 2009 2011 2013 2015 2017 2019

Funding spreads are wider, but mostly below '08 peaks

3m funding spreads vs. OIS, since 2007 (in basis points)
450 Peak, 2008 Yield dispersion spiked, but has started to normalize
Sep-19 Root Mean Square Error (RMSE) of the Treasury yield curve
350
Today 5.0
250 Bloomberg US Govt Securities Liquidity
4.5
Index
150 4.0 Last
3.5
50
3.0
-50 2.5
2.0
-150
1.5
-250 1.0
Repo Bills JPY OIS EUR OIS Nonfin CP Libor
XCCY XCCY 0.5
0.0
2010 2012 2014 2016 2018 2020
 2019 returns were mainly driven by multiples expansion
Major index returns by contributor, percent

40% Dividend contribution

Valuation contribution
35% Total Return 31% Earnings contribution
30% 27% 28%

25%
20% 18%

15% 19%
10%
5%
0%
-5%
-10%
MSCI AC S&P 500 STOXX TOPIX MSCI EM
World (USD) Europe 600 (JPY) (USD)
(USD) (EUR)

US Bear markets & recoveries since the 1800s

Average S&P 500 bear market decline, percent; average length and recovery time, months
Average decline Average length 120 Average time to recover
0 45
40
-10 100
35
-20 30 80

25
-30 60
20
-40 15 40
10
-50 20
5
-60 0 0
Average Structural Cyclical Event Average Structural Cyclical Event Average Structural Cyclical Event
Driven Driven Driven
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Our Bear Market Indicator is down from elevated levels

GS Bear Market Indicator (GSBLBR Index), percent
100%

90%

80%

70%

60%

50%

40% 51%

30%

20%

10%

0%
55 60 65 70 75 80 85 90 95 00 05 10 15 20

But the underlying components paint a mixed picture

Current level of GS Bear Market Risk Indicator’s sub-components
Level Percentile

Unemployment 3.5 95%

Shiller PE 22.2 68%
0-6 quarter yield curve 1.1 47%
Core Inflation 2.4 45%
ISM 50.1 30%
Private sector Financial Balance 5.2 21%
GS Bear Market Risk Indicator 51%
 Time to recover back to
S&P 500 previous level Volatility

Peak to Trough to
Start End Length (m) Decline (%) Nominal (m) Real (m) trough recovery
May-1835 Mar-1842 82 -56 259 - 13 17
Aug-1847 Nov-1848 15 -23 42 - 8 9
Dec-1852 Oct-1857 58 -65 67 - 19 25
Mar-1858 Jul-1859 16 -23 11 - 21 15
Oct-1860 Jul-1861 9 -32 15 - 31 17
Apr-1864 Apr-1865 12 -26 48 - 14 8
Feb-1873 Jun-1877 52 -47 32 11 11 11
Jun-1881 Jan-1885 43 -36 191 17 9 11
May-1887 Aug-1893 75 -31 65 49 10 12
Sep-1902 Oct-1903 13 -29 17 22 9 10
Sep-1906 Nov-1907 14 -38 21 250 15 11
Dec-1909 Dec-1914 60 -29 121 159 9 12
Nov-1916 Dec-1917 13 -33 85 116 12 12
Jul-1919 Aug-1921 25 -32 39 14 15 10
Sep-1929 Jun-1932 33 -85 266 284 30 20
Mar-1937 Apr-1942 62 -59 49 151 20 10
May-1946 Mar-1948 21 -28 27 73 14 12
Aug-1956 Oct-1957 15 -22 11 13 9 9
Dec-1961 Jun-1962 6 -28 14 18 15 9
Feb-1966 Oct-1966 8 -22 7 24 10 8
Nov-1968 May-1970 18 -36 21 270 9 10
Jan-1973 Oct-1974 21 -48 69 154 15 11
Nov-1980 Aug-1982 20 -27 3 8 12 20
Aug-1987 Dec-1987 3.3 -34 20 49 45 13
Jul-1990 Oct-1990 3 -20 4 6 17 14
Mar-2000 Oct-2002 30 -49 56 148 19 11

Oct-2007 Mar-2009 17 -57 49 55 32 16

Average Structural 42 -57 111 134 20 14
Average Cyclical 27 -31 50 73 14 13
Average Event-driven 9 -29 15 71 19 102
 Gold underperformed in '08, until the Fed stepped in
Performance of Gold, USTWD, SPX; indexed to Jan '08

1.5 Gold US trade weighted dollar S&P 500

1.4 Fed announes
600 Bill USD QE
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
Gold has sold off as liquidity has dried up 0.5
Gold price, $/toz; US commercial paper spread (rhs, inv), %
0.4
1800 -1.5 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09
Gold price

1750 US commercial paper spread (rhs, inv) -1.0

1700 -0.5

1650 0.0

1600 0.5

1550 1.0

1500 1.5

1450 2.0

1400 2.5
01 Jan 13 Jan 25 Jan 06 Feb 18 Feb 01 Mar 13 Mar
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Disclosure Appendix