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The U.S. Stock Market Could Crash Another 25% If This Nightmare Scenario Unfolds

Last Updated September 23, 2020 1:40 PM
Harsh Chauhan
Last Updated September 23, 2020 1:40 PM
  • The U.S. stock market’s decimation this year has been quicker than in 2008.
  • The Dow and S&P 500 could lose more than they did during the Great Recession.
  • GDP contraction and negative earnings growth are headwinds for the stock market.

The U.S. stock market has officially entered bearish territory in 2020 as investors fear the economic fallout of the COVID-19 outbreak. The Dow Jones and the S&P 500 have been rattled in the space of just over a month, but the bad times may not be over just yet.

With the way things are unfolding, we may see a picture that turns out to be worse than in 2008.

Coronavirus has triggered a much bigger stock market crisis

On Feb. 12, the Dow closed at a record  29,551 points. As of this writing, the Dow is trading close to 21,600 points – a drop of nearly 8,000 points or 27% from the peak. The picture is similar elsewhere in the U.S. stock market.

The S&P 500 hit a peak on  Feb. 19 when it closed at 3,386 points. Cut to the present and the index is now trading above 2,500 points, a drop of more than 26%. A stock market correction technically happens when an index drops 20% or more from the recent peak.

Chart showing the Dow and the S&P.
The Dow Jones and S&P 500 have been decimated in a short time this year. | Source: Yahoo! Finance

The bad news is that we may be in the early days of a major downturn. It has taken more than just one month for the market to lose over 20% of its value. The Dow is sitting on a loss of nearly 30% from last month’s peak.

The stock market’s decimation during the novel coronavirus outbreak has been much quicker as compared to the Great Recession of 2007-08. At that time, the stock market had lost nearly half of its value  in 16 months.

Chart showing Dow and S&P 500 during the Great Recession.
The stock market decline in 2008-09 took longer to materialize. | Source: Ycharts

There are chances that the stock market crash of 2020 could assume a far greater proportion as compared to 2008 levels. The Dow may fall another 20% if we use the Great Recession as a benchmark, while the S&P 500 could lose another 29%. But there are a few reasons why the current crash could surpass the one during the Great Recession.

Poor earnings and economic contraction could crush the Dow

Goldman Sachs recently downgraded the U.S. economic outlook for the first two quarters of 2020. The investment bank expects zero GDP growth  in the first quarter followed by a 5%  contraction in the second quarter.

This is bad news for the U.S. stock market as the situation in 2008 was slightly better than what Goldman is predicting for the first two quarters of 2020.

Back then, the U.S. economy had expanded 2.1% in the second quarter , as per revised estimates, following a contraction of 2.3% in the first one. This means that the U.S. economy will be in a weaker position in the first half of the year due to coronavirus.

JPMorgan predicts something similar  as it forecasts an economic contraction of 2% in the first quarter and 3% in the second. The bank estimates that a recession will rock the U.S. by July as economic activity grinds to a halt on account of quarantines.

But this isn’t the only headwind that major stock market indices face in the coming weeks.

U.S. earnings season is slated to begin next month and investors should prepare for a major disappointment. At the end of February, Goldman Sachs pointed out that U.S. companies won’t be delivering any growth in 2020  due to coronavirus.

Goldman analysts slashed their earnings per share estimate for the S&P 500 to $165 from $174 previously. The original forecast had called for a 7.7% jump in earnings. The situation could be worse than expected as major S&P 500 components  such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB) take a hit.

Apple has already announced that it’s closing stores outside Greater China  until Mar. 27. Microsoft says its Windows sales will take a hit , while Facebook could lose a substantial chunk of ad revenue . This is bad news for the Dow as well because Apple and Microsoft carry a combined weight of nearly 13% of the index.

The U.S. economy is expected to return to normal  by the end of the year. But the fact that a vaccine is still at least a year away  may continue to weigh on the stock market. This is why investors should prepare for the possibility that the Dow and S&P 500 might be in for a bigger downturn as compared with 2008-09.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.