Analysis: Stocks to Plunge Another 11% as Coronavirus Outbreak Worsens

Consecutive drops to put US stock market into bear-market territory

Image Credits: JOHANNES EISELE / Contributor / Getty.

Shortly before US stocks suffered another triple-digit point drop at the open – dampening the cheers of traders and pundits who gleefully celebrated stocks going positive for the week on Wednesday – MSCI warned on Thursday that another double-digit drop could be in store for US stocks, Reuters reports.

Like most other analysts, Thomas Verbraken, the executive director for risk management at the research and indices giant, said his risk models suggest that a short-term drop in growth of 2 percentage points, and an attendant drop in corporate earnings, could hammer stocks even lower, erasing much (but not nearly all) of the gains since President Trump’s inauguration.

“We’ve conducted a what-if scenario analysis that assumes a short-term drop in growth of 2 percentage points and a risk-premium increase of 2 percentage points,” Thomas Verbraken, executive director at MSCI’s risk management solutions research told clients.

“Our model indicates that, in such a scenario, there’s room for further short-term losses: U.S. equities — already down 11% from Feb. 19 through March 3 – could drop a further 11%.”

Earlier this week, the OECD became the first major NGO to warn that the virus could seriously restrain global growth if the outbreak doesn’t fade with the warm spring weather, like President Trump hopes it will.

The OECD said that global growth could shrink “by half” thanks to the outbreak, as the twin supply- and demand-side disruptions wreak havoc on consumption and manufacturing.

All told, two consecutive 11% drops would be equivalent to a more than 20% decline from the all-time highs, which would put the US market solidly into bear-market territory.

Most Wall Street banks have been slower to lower their equity year-end forecasts, but suffice it to say, a 20% drop would leave stocks well below where most of the big banks expect they will be at year’s end.

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