Please ensure Javascript is enabled for purposes of website accessibility

Why General Electric Stock Dropped 6% This Morning

By Rich Smith – Jun 10, 2020 at 4:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Fear of a coronavirus second wave trumped a positive forecast today.

What happened

Shareholders of General Electric (GE -1.31%) probably expected a big boost to their stock price on Wednesday, after the company made some pretty positive pronouncements in an investor update on its website.

Instead, while this blue chip stock didn't do quite as badly as it did earlier in the morning (down 5.1% at the close today, after falling more than 6% in early trading), the stock isn't looking particularly healthy, either.

Cartoon characters confused by stock chart arrow falling and crashing into floor

Image source: Getty Images.

So what

Why is that? Let's start with the good news. Addressing questions for its investor relations department, GE said that although all its businesses have been hurt by COVID-19 -- especially aviation, GE Capital Aviation Services, and healthcare -- which will cause negative free cash flow this year, it foresees positive free cash flow in 2021 and a return to "high-single-digit free cash flow margins over time."  

GE plans to offset the $3.5 billion to $4.5 billion in negative free cash flow it forecasts for Q2 2020 with $2 billion of cost-cutting and $3 billion of cash preservation moves, 80% of which should come through in the second half of 2020, growing back toward cash profitability by 2021.

Now what

Now here's the bad news:

If scientists discover a safe and effective vaccine against coronavirus in short order, then the damage done in 2020 should be fixable in 2021. To date, however, no such vaccine has been found. So Dr. Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases, reminded investors today that the pandemic "isn't over yet."  

Moreover, the chief economist for the Organization for Economic Cooperation and Development (OECD), Laurence Boone, followed up on Fauci's glum note with a warning of her own. While it's possible that COVID-19 will deliver only a "single hit" to the economy, she said, it's just as likely that a second wave of cases will hit us, perhaps during the fall flu season. And if so, we're probably looking at about an 8.5% contraction in GDP this year, followed by a recovery of less than 2% growth in 2021.  

So it's not necessarily a great thing to be an "economic bellwether" like GE. As the economy goes, so goes GE. Or at least that's what investors are worrying might happen today.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Electric Company Stock Quote
General Electric Company
$61.91 (-1.31%) $0.82

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.