If I could hand out rewards for the most surprising publicly traded securities of 2020, General Electric (NYSE:GE) stock would certainly be among the top contenders.
With the economic devastation stemming from the novel coronavirus, GE stock seemed like dead money. As well, the organization was already embattled well before the pandemic. But then, a number of positive catalysts helped save the day.
First, General Electric managed to close a legal matter that had clouded the organization. It agreed to pay $200 million to “settle an investigation by the Securities and Exchange Commission into accounting practices relating to its insurance and power-generation businesses.” According to Gordon Haskett analyst John Inch, the settlement “clears a path for GE to issue equity capital to shore up its financial position.”
Second, we have a new administration incoming with President-elect Joe Biden. Though his electoral victory has aroused substantial controversy with the right, for GE stock, this was the ideal situation. Shares were already moving higher in October as the polls suggested that the former vice president would have a legitimate shot of winning. Then they exploded higher as it became apparent that he would take the White House.
It’s worth reiterating that while the 2020 election was a significant issue for many companies, it may have been a lifeline for GE stock. For example, you’ll recall that General Electric didn’t perform so well throughout most of President Donald Trump’s administration. True, this was more because of the industrial giant’s shortcomings. Nevertheless, GE didn’t start moving robustly higher until relations between the U.S. and China started to thaw.
Of course, Covid-19 disrupted this storyline for the worse. And GE stock may very well have cratered from there if Trump emerged victorious. But can Biden truly help General Electric build back better?
Should You Trust the Leading Indicator That Is GE Stock?
On one end of the spectrum, the remarkable upside performance of GE stock is a testament to General Electric’s CEO Larry Culp. When he took the top job, Culp recognized that he had to make painful decisions to save the iconic firm. True to his word, he has been “focused on cutting costs through the pandemic and paying down debt.”
On the other end, you can only cut so much before you hamper your long-term objectives. Furthermore, when your back is to the wall, you need several factors to move your way. Particularly, the industries which General Electric serves must perform well. Unfortunately, this is where much of the confusion lies for GE stock.
From my research, I discovered that GE shares possibly represent a leading indicator for total construction spending for commercial purposes. As an example, between 2007 and 2008, GE stumbled severely while commercial construction spending took a comparatively modest hit. However, this spend eventually cratered a year later.
Then, in 2010, commercial construction spending dropped even more into the abyss. But in that same year, GE stock shot higher, predating the following year’s substantive rally in construction spending.
Finally, between 2016 through 2019, GE succumbed to what appeared to be a death rattle. Again, I acknowledge that most of the stock’s problem was due to General Electric specifically. But sure enough, the volatility in GE predated lower commercial construction spending.
Basically, GE stock is a harbinger but what kind is it? Or the question right now is, does General Electric’s recent bullishness signal upside for various commercial enterprises?
If we are to follow the logic of the above relationship between General Electric stock and commercial construction spend, the trend augurs well for both metrics. However, the cautionary tale here is that the coronavirus has driven us into a new normal. Therefore, the old assumptions may not apply anymore.
Searching for Clues
To really understand the viability of GE stock, we will need access to additional economic data. Unfortunately, those are on a time lag so that puts us at a disadvantage. However, we can extract some clues from information that’s available.
According to a CNBC report, the jobless claims number for the week ending Dec. 5 was 853,000 cases, significantly higher than the estimate calling for 730,000 claims. This suggests that challenges are starting to form in the labor market after several weeks of encouraging data.
In addition, the employment level for construction and extraction occupations declined by 2.6% between October and November. This is the first month-to-month decline in the sector since the coronavirus disrupted the economy. Further, this performance is conspicuously worse than the employment level for all occupations, which was flat during the same period.
Fundamentally, then, the ecosystem isn’t favorable for GE stock. Thus, if I had to guess, stakeholders may want to consider taking some chips off the table.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.