- The Dow will likely continue falling this week as markets digest the severity of the coronavirus outbreak in the U.S.
- Data out this week will add to the gloomy picture of a sharp decline in economic activity.
- Without a coordinated coronavirus response, the Dow could make its way up to 30% lower in the days to come.
The Dow Jones Industrial Average fell meaningfully lower on Friday as coronavirus cases in the U.S. saw a nauseating spike. Dow futures pointed to a lower open on Monday as traders braced for what promises to be a volatile week.
Coronavirus Stimulus Isn’t Enough to Plug the Hole
Reality is sinking in for U.S. financial markets as the health crisis across the nation deepens. Though markets initially cheered the government’s $2 trillion coronavirus relief package, many are starting to question whether it will be enough.
Some argue that the amount is not only too small to support the massive rollback in corporate spending but that the government is distributing it irresponsibly. Only $100 billion is destined for the healthcare sector, which many believe is far too little.
Without the coronavirus outbreak under control, the stimulus is merely treating a symptom of the underlying problem. $100 billion to support an influx of 3 million new patients (in a best-case scenario) simply isn’t enough.
Greater Depression Is Imminent
New York University’s Nouriel Roubini likened the current predicament to a “greater depression.” He thinks it will surpass the hardships of the Great Depression. He argues that the best-case “v-shaped” recovery that some are predicting assumes that countries across the world are enforcing strict lockdowns and tracking COVID-19’s spread carefully.
Unfortunately for the best-case scenario, the public-health response in advanced economies has fallen far short of what is needed to contain the pandemic, and the fiscal-policy package currently being debated is neither large nor rapid enough to create the conditions for a timely recovery. As such, the risk of a new Great Depression, worse than the original – a Greater Depression – is rising by the day
The Dow Could Lose 25-30%
Roubini isn’t alone in his gloomy outlook— Professor of Economics at NYU Roman Frydman is equally concerned. He says without further stimulus and more focus on fighting coronavirus, the market could suffer another 25-30% drop.
If, as many forecasters anticipate, the economy contracts at a rate of 20% or more over the coming few months, and then experiences additional shocks when public health measures falter or seasonal effects appear, not only will earnings fall by as much as 25%, but uncertainty will force a large contraction of valuations. From here, it is easy to imagine another 25-30% drop in the stock market.
Economic Fall-Out to Become More Clear
Further evidence of an economic meltdown is due out this week. Weekly jobless claims hit historic highs last week. Unemployment claims will only increase as more states enter lockdown.
Auto sales and ISM manufacturing data on Wednesday will likely add to the gloomy picture of the American economy. Car sales are expected to decline sharply despite dealerships’ efforts to offer deliveries. Service sector data out on Friday will likely tell a similar story.
Coronavirus Cases Will Weigh on the Dow
Add to that another marked increase in coronavirus cases, and you have a recipe for disaster among equity markets. Sam Stovall, Chief Investment Strategist at CFRA, believes the Dow and S&P 500 are heading lower in the coming days. He pointed to previous bear markets saying it’s not unusual to see rapid gains followed by new lows.
There have been multiple times in history – 1973/1974, 2001/2002, and combined with 2008, 2009, that we saw 20 plus percent rallies before ultimately setting an even lower low.
The Dow is likely to be driven by the virus itself this week. The stock market has been able to rally despite the rising coronavirus risks. But until the number of cases peaks, there’s no telling what kind of economic pain lies ahead.
For now, Congress has put a bandaid on a bullet hole. It will help businesses and consumers get by, but it probably won’t boost GDP growth.