- Nouriel Roubini, who predicted the 2008 crash correctly, claims global equities could take a 40% hit because of the coronavirus outbreak.
- Dow Jones jumped over 5% on Monday, but such volatility is indicative of a bear market rally.
- Roubini’s prediction may prove correct as rate cuts will fail to work as a measure to stimulate spending. Investors losing faith in the Federal Reserve’s ability can lead to a brutal stock market crash.
Famed economist Nouriel Roubini is known for making gloomy predictions that often come true. He was warning the markets of an impending recession in 2006, and it came true shortly thereafter in the form of the subprime mortgage crisis.
Labeled Dr. Doom for his melancholy predictions, Roubini is now claiming global equities could plummet 40% due to coronavirus. If his prediction comes true, the Dow Jones could crash to sub-18,000 levels.
Coronavirus Fears Grips the World
Google search trends show coronavirus is the most significant cause of concern around the world. So far, coronavirus has managed to leave all other modern outbreaks behind.
The death toll from coronavirus is still less than that of SARS and Ebola, but the infectious nature of the disease has forced governments to take extreme measures to contain the outbreak.
Coronavirus is still spreading rapidly across the globe. The disease has already reached over 70 countries with no signs of stopping. So it’s likely to impact stock markets further.
Dow Jones Rally is a Plea to the Fed
The Dow and the S&P 500 came roaring back on Monday after experiencing one of the fastest crashes in recorded history.
Monday’s rally was a relief for the bulls, but investors need to remember that rallies this intense are usually indicative of a bear market. Bull market rallies are calmer and consistent.
So it’s possible that Monday’s stock surge could turn out to be a head fake.
Rate cuts and Liquidity Injections will be a Letdown
One of the most important factors behind the Dow Jones’ rally was the expectation of a rate cut from the Federal Reserve. However, it’s likely that central bank interventions will be useless in this scenario.
Since coronavirus is a biological problem and not a liquidity problem, injecting more money into the financial system is not going to help. Central banks worldwide are adamant on trying it nonetheless.
Over the years, investors have put a lot of faith in the Federal Reserve’s ability to pump the stock market. Coronavirus has rendered the Fed’s powers useless as global trade plummets and consumers think twice about travelling.
Markets will eventually realize that money printing is not going to solve the problem. The psychological change arising from such a situation could lead to a devastating crash that validates Dr. Doom’s forecast.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.