The U.S. stock market broke through a crucial 11-year trend line , after the S&P 500 dropped by 11.98% on a single day. With no major support levels in sight, the market is vulnerable for another 10% to 15% fall.
As the S&P 500 dropped below 2,400 points, the Dow Jones Industrial Average (DJIA) plummeted through a strong support level from 2017. That leaves the Dow Jones with no imminent ground for recovery until 18,300.
Technical indicators indicate that the bottom of the U.S. stock market is still far from being reached.
Both the S&P 500 and Dow Jones have broken multi-year trend lines that have maintained the upward momentum of the stock market, even during times of heightened uncertainty like in 2019 when the trade dispute between the U.S. and China hit its peak.
A large part of the struggle of the U.S. stock market to recover from the recent is that the downturn has little to do with monetary policies.
For that reason, Gina Sanchez of Chantico Global said that while monetary tools like stimulus cannot necessarily help the stock market to rebound.
She said :
What we need to hear is that the virus is contained, and no amount of fiscal or rather monetary stimulus will help that. It will simply help ease the pain that’s going to be experienced over the next six months.
As analysts predict the downtrend in the stock market to last throughout 2020, and the aggressive approach of the Federal Reserve regarding the benchmark interest rate and liquidity injection fails to work, breaching crucial support levels in the near-term could result in even a bigger correction of stocks.
Major banks like Goldman Sachs foresee the U.S. stock market dropping by another 16 percent in the near-term before it shows any sign of recovery.
Another 15 percent drop from current levels would send the Dow Jones to 17,000 points, which would be another strong support area after 18,300.
In the aftermath of the coronavirus pandemic, strategists anticipate that low earnings in 2020 would lead to the revaluation of stocks that could be much worse than the expectations of investors.
John Ricciardi, head of global asset allocation at Merian Global Investors, said that the stock market trend is a “continuation of 2008,” adding that the bond markets are showing similar numbers .
FactSet data shows that analysts are forecasting a 1.7% drop in earnings in the first quarter of 2020. Up until late 2019, the stock market was pricing in a 4.4% increase in earnings in the first three months of the year.
The abrupt drop in corporate earnings put together with intensifying fear towards the coronavirus pandemic and the breach of multi-year trend lines could signal that the bottom of the U.S. stock market is still far from being reached.