The Dow dropped 733 points, or 2.53% this week [Barron’s] as coronavirus cases soared.
Famed technical analyst, Ralph Acampora of Prudential Securities says the stock market will plunge 10% because of the coronavirus [MarketWatch]. He said Friday that the pandemic is an exit opportunity for an overheated stock market:
The market itself was stretched, which is true, so we were begging for some kind of correction and this is the catalyst.
He predicts a reeling 10% loss in market value:
I think it’s going to be a little deeper. I am looking at 10% maybe a little bit more even.
His bearish forecast is based on the current state of the coronavirus emergency. But the pandemic looks like it’s going to get much worse.
The propagation of new cases is accelerating drastically.
In the 24 hours after Acampora’s remarks [New York Times]:
Chinese officials on Saturday reported the highest death toll so far in a 24-hour period.
The 46 new deaths in China raised the toll to 259.
About 2,100 new cases were also recorded in the country in the past 24 hours, raising the worldwide total to nearly 12,000, according to Chinese and World Health Organization data.
That’s a quarter of the total number of 2003 SARS cases over nine months in just 24 hours. The SARS outbreak had just over 8,000 total infections [WHO] by the time it was over. And back then, China’s economy wasn’t nearly as big as today, or as integral to the health of the global economy and U.S. stock values [CNBC].
Conditions are ripe for a 10% correction to spark a market panic. Not only is coronavirus spreading faster than SARS, but the outbreak coincides with a stock market at a historic peak. The past two big global pandemics coincided with historic lows.
In fact, the stock market is more overvalued relative to GDP than before the Great Recession and Dot Com crash. Before the Dot Com bubble burst, total U.S. market cap was 146% of GDP. And before the Great Recession, the U.S. market cap was 137% of GDP. Today, the “Buffett indicator” is 153% [Wilshire via YCharts].
So why didn’t the 2018 correction deepen into an epic stock market crash like the Dot Com bubble and Great Recession? The economy was strong and job growth was barreling full steam ahead. But now recession is looming on the horizon.
The yield curve is on the verge of inverting again like it did last May. 3-month yields closed to within 10 basis points of 10-year Treasury notes this week [CNBC]. 97% of CFOs are bracing for a recession this year [Forbes]. And job growth is losing steam. While the economy is still adding jobs, 2019 was the slowest year of job growth since 2011 [NBC].
During the correction from August to December of 2018, the stock market had its eye on rising interest rates and the U.S. China trade war [PBS]. It was pricing in geopolitical risk and hawkish monetary policy. But 2019’s bull market showed foreboding corporate multiples were far from Wall Street’s mind. Today the S&P 500 forward price-to-earnings ratio has climbed back above pre-2018 levels [MarketWatch].
The stock market is due for a final reckoning with its underlying fundamentals. The Dot Com bubble and Great Recession were essentially caused by the financial system holding too many risky assets that weren’t really worth their purported value. In the case of the NASDAQ bubble, it was equities. In the Great Recession, it was loans. Today it’s both.
Disclaimer: The reports and opinions in this article do not represent investment or trading advice from CCN.com.
Last modified: February 2, 2020 11:54 AM UTC