What if we told you that just when the Housing Bubble was beginning to unravel over a decade ago and the majority of Wall Street brokerage firms would face insolvency as a result of the all the toxic debt they had on their books, that there was one firm that had the foresight to not only avoid the bad debts but to take the other side of Wall Street’s bets? Clearly, one would assume that the stock of this company would not only have been a good investment relative to its peers but to the broader market as well. Well, that hasn’t exactly been the case. The stock we are talking about is Goldman Sachs (GS).
While Goldman was celebrated for years for having avoided the Housing Bubble and claiming that they didn’t even want to be part of the government bailout of the financial sector, the long-run performance of its stock has not been nearly as good as one would expect. The first chart below shows the relative strength of the stock versus the S&P 500 Financial sector going back to the start of 2000. When the line is rising, it indicates that GS is outperforming, while a falling line indicates that the stock is underperforming. From the time of its IPO in late 1999 through the middle part of the following decade, shares of Goldman performed pretty much in line with the Financial sector and even lagged modestly. Beginning in 2005, though, the stock’s fortunes turned, and Goldman became one of the sector’s leaders. There was a period of volatility in its relative strength in late 2008, but then the stock really pulled ahead in late 2008 through early 2009 as the market recognized the company’s adeptness in avoiding the subprime crisis. Goldman was now considered “the smartest firm on the street.”
Ever since the middle of 2009, though, Goldman has generally been a market laggard, erasing much of its outperformance from the Financial Crisis. In fact, going all the way back to December 2007, the price of Goldman and the Financial sector as a whole have had nearly identical returns in terms of price. While Goldman is down 10.1% since the start of December 2007, the S&P 500 Financial sector is down 9.8%. In addition, of the current members of the S&P 500 Financial sector, 41 stocks have outperformed Goldman since the start of December 2007 compared to just 18 that have underperformed. Granted, there’s a bit of survivorship bias here as companies like Lehman and others went under, but it does illustrate how Goldman has not been a leader of the sector over the last decade.
Relative to the S&P 500, it’s a similar story. Outside of a brief period right after Lehman went under, Goldman outperformed the S&P 500 by a wide margin during and through the Financial Crisis. That outperformance peaked in the late Summer of 2009, and ever since then, the stock has given up most of its outperformance. Going back to the Summer of 2005, nearly 13 years ago, Goldman and the S&P 500 are both up 123% in terms of price. In other words, the stock hasn’t generated any alpha during that span.
So what happened? There are a number of factors behind the decline in Goldman, but one worth noting here can be summed up in two words – Matt Taibbi. Just about everyone remembers back in July 2009, when Taibbi wrote a scathing article for Rolling Stone that referred to Goldman as the “great vampire squid.” The article went on to accuse Goldman and its alumni of feeding all of the major bubbles throughout US history only to profit with taxpayer money once the bubbles burst. Whether you agree with the article or not, it was a public relations nightmare for the company. The media and the general public were looking for a scapegoat, and who better to blame than the company that actually profited from the crisis?
Looking again at the relative strength chart of Goldman Sachs versus the Financial sector and the S&P 500, it’s hard not to argue that the “Vampire Squid” article didn’t have an impact on the public’s perception of Goldman and ultimately its stock price. While the Rolling Stone story wasn’t published exactly when Goldman’s relative strength peaked versus the Financial sector and the S&P 500, it preceded the peak, not by a matter of months, but more like a matter of weeks.
Getting back to the present, can you think of another super successful company that has recently become a scapegoat for the public’s uneasiness over privacy? We’ll give you a hint: booster seats.