Goldman Sachs warns US stocks could plunge another 16% before rapidly recovering

Allianz Chief Economic Adviser Mohamed El-Erian argues the Fed should have focused on relieving market failures.

Posted: Mar 16, 2020 11:41 PM
Updated: Mar 16, 2020 11:41 PM

Mayhem has descended upon global financial markets. The Dow has suddenly crumbled to a three-year lows. Crude oil is in an epic tailspin. And central banks are racing to put out fires.

The damage on Wall Street might not nearly be done as authorities scramble to stop the spread of the coronavirus by shutting down parts of the once-booming American economy.

Goldman Sachs is warning clients that the S&P 500 could bottom at 2,000 by midyear, marking a 41% plunge from the record highs set just a month ago. The Wall Street bank expects stocks to rapidly recover before the end of the year.

"The coronavirus has created unprecedented financial and societal disruption," Goldman Sachs strategists wrote in a note to clients Sunday.

A bottom of 2,000 in the S&P 500 would mark a 26% drop from Friday's close. And it would translate to a roughly 16% decline from Monday's close at 2,386 after another ferocious day of selling that once again forced trading to be halted.

The Dow is now on track for its worst month since October 1987, the month of the infamous "Black Monday" crash.

"The recent price action in the S&P 500 has been eerily similar to late September/early October 2008," Lori Calvasina, head of US equity strategy at RBC Capital Markets, wrote in a note to clients Monday.

US stocks plunged by 57% during 2008 crisis

Investors are increasingly pricing in the risk that the United States tumbles into a recession because of the coronavirus pandemic.

"This could be a fast bear market like that of 1987. However, this time, a short recession is likely," Ed Yardeni, president of investment advisory Yardeni Research, wrote in a Monday note to clients.

During the 11 recessions since World War II, the S&P 500 suffered an average peak-to-trough decline of 30%, Goldman Sachs said. However, US stocks fell significantly more during the last two downturns as corporate earnings cratered.

The S&P 500 lost 49% of its value after the tech bubble burst in 2000. And the index was down by as much as 57% during the 2008 financial crisis. Such a steep losses this time would cause the S&P 500 to sink to 1,700.

It's incredibly hard to precisely time a bottom in stocks. Retail investors shouldn't bother trying to do so because even the professionals admit they're not sure.

"Precision is difficult in a volatile market with daily price swings of +/-5% and a VIX level of 75," Goldman Sachs strategists noted.

Has capitulation been reached? Maybe not

Market confidence has clearly eroded, though perhaps not by as much as is needed to suggest a bottom has been reached.

RBC said that institutional investor sentiment, measured by asset manager positioning in US equity futures, has dropped significantly but remains well above the lows of December 2018, March 2009 and other recent market troughs. Even if this measure tumbled by another 30%, it would still be above those market bottoms, RBC said.

Likewise, bullishness among retail investors may not be done fading.

The gap between bulls and bears in the American Association of Individual Investors (AAII) survey has tumbled to --21.6%, RBC said. But it dropped to --26.5% in August 2019, -28% in December 2018 and --51.4% during the financial crisis.

"Sentiment has deteriorated further on both but not enough to suggest that either camp has capitulated," Calvasina wrote. "The sentiment data was telling us that it was still premature to call a bottom in the S&P 500 or an end to the stock market's recent bout of extreme volatility."

Earnings could fall sharply

Corporate America's bottom line is going to get hit very hard by the coronavirus pandemic.

Goldman Sachs has downgraded its per-share earnings forecast for the S&P 500 twice in two weeks and now expects "extreme weakness" that peaks with a 15% drop in the second quarter. However, Goldman expects a speedy rebound in earnings that will propel stock prices later in 2020.

"The lesson of prior event-driven bear markets is that financial devastation ultimately allows a new bull market to be born," Goldman Sachs strategists wrote.

For instance, the S&P 500 plunged by 19% after the 1998 Russian sovereign debt default. But stocks than ripped 28% higher over the next six months.

A similar rebound happened in 2011 after US stocks tumbled 19% during the European debt crisis. That gave way to a 29% recovery in six months.

3,200 by the end of the year?

A rebound later in 2020 could be aided by extreme steps taken by global central banks to restore confidence and keep markets functioning.

The Federal Reserve has embarked on two emergency rate cuts this month, including one late Sunday that sent rates back to zero. The Fed has also promised to pump in trillions of dollars of cash into financial markets and relaunched its 2008 crisis-era bond buying program known as quantitative easing.

"There is nothing the Fed can do about the viral pandemic. But these moves should help to calm the pandemic of fear in the financial markets," Yardeni wrote.

Goldman Sachs is predicting the S&P 500 will rocket back to 3,200 by the end of 2020. That would amount to a 60% spike from the forecasted low of 2,000. Fasten your seatbelts.

Indiana Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 47432

Reported Deaths: 2687
CountyConfirmedDeaths
Marion11546683
Lake5104242
Elkhart321144
Allen2737129
St. Joseph190866
Cass16389
Hamilton1538100
Hendricks1390100
Johnson1256118
Porter72037
Tippecanoe6948
Madison65564
Clark64044
Bartholomew58244
Howard56557
LaPorte56326
Kosciusko5354
Vanderburgh5026
Marshall4823
Jackson4693
Noble46928
LaGrange4677
Hancock44035
Boone43743
Delaware43150
Shelby42325
Floyd37144
Morgan32731
Montgomery29320
Grant29126
Clinton2882
Monroe27628
Dubois2666
White26010
Henry25815
Decatur24932
Lawrence24225
Vigo2318
Dearborn22823
Harrison21222
Warrick21229
Greene18532
Miami1822
Jennings17411
Putnam1688
DeKalb1604
Scott1607
Daviess14216
Orange13623
Wayne1366
Steuben1282
Perry1279
Franklin1248
Ripley1157
Jasper1142
Wabash1122
Carroll1102
Fayette987
Newton9810
Starke923
Whitley905
Randolph784
Huntington742
Jefferson722
Wells711
Fulton691
Jay680
Washington681
Gibson672
Knox640
Pulaski641
Clay604
Rush563
Adams501
Benton480
Owen471
Sullivan441
Brown381
Posey380
Blackford372
Spencer371
Crawford300
Fountain302
Tipton301
Switzerland260
Martin220
Parke220
Ohio140
Vermillion140
Warren141
Union130
Pike100
Unassigned0193

Ohio Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 56183

Reported Deaths: 2907
CountyConfirmedDeaths
Franklin10023420
Cuyahoga7571372
Hamilton5770197
Marion273038
Lucas2700302
Pickaway218841
Summit2110206
Montgomery193126
Mahoning1818231
Butler154744
Columbiana129560
Stark1091112
Lorain99767
Trumbull92565
Warren82321
Clark7659
Delaware55315
Belmont54422
Fairfield54316
Tuscarawas54110
Medina50832
Lake49218
Licking46612
Miami45531
Portage43258
Ashtabula43144
Wood41251
Geauga40042
Clermont3946
Wayne36051
Richland3325
Allen30840
Mercer2808
Greene2489
Darke24625
Erie23622
Holmes2263
Huron2112
Madison1938
Ottawa14323
Crawford1355
Washington13120
Putnam12715
Sandusky12714
Hardin12012
Ross1183
Morrow1161
Auglaize1064
Coshocton942
Monroe8817
Jefferson872
Union821
Muskingum811
Hancock781
Hocking788
Preble731
Williams692
Clinton680
Guernsey683
Lawrence680
Shelby654
Fulton610
Ashland581
Carroll583
Logan581
Wyandot586
Brown561
Defiance503
Athens491
Knox481
Fayette460
Highland441
Champaign391
Scioto380
Van Wert340
Seneca332
Perry321
Henry290
Adams231
Paulding230
Pike230
Jackson220
Vinton222
Gallia161
Harrison121
Meigs120
Morgan110
Noble110
Unassigned00
Fort Wayne
Scattered Clouds
70° wxIcon
Hi: 92° Lo: 68°
Feels Like: 70°
Angola
Clear
66° wxIcon
Hi: 90° Lo: 68°
Feels Like: 66°
Huntington
Broken Clouds
67° wxIcon
Hi: 90° Lo: 68°
Feels Like: 67°
Decatur
Clear
64° wxIcon
Hi: 92° Lo: 69°
Feels Like: 64°
Van Wert
Clear
64° wxIcon
Hi: 92° Lo: 68°
Feels Like: 64°
More Heat & Humidity Sunday
WFFT Radar
WFFT Temperatures
WFFT National

Community Events