U.S. stock markets have formally entered a correction, with Goldman Sachs predicting further falls if the coronavirus continues to spread.
The U.S. stock market is being terrorized by the coronavirus. The Dow Jones Industrial Average fell by almost 1,000 on Thursday morning. Sitting at around 26,000, the plunge marked a 12% drop since the Dow’s 52-week high of 29,551 in early February.
Technically, this means the Dow has formally entered a market correction, as has the Nasdaq. And given that Goldman Sachs is now predicting further falls up until at least the second half of the year, 2020 is shaping up to be a lost year for American and global economic growth.
It’s no surprise that the U.S. stock market has again been spooked by the coronavirus. On Wednesday, President Trump went so far as to declare that America is doing a great job of containing the virus. Understandably, investors regarded this declaration as a tell-tale sign that the virus has scared the White House.
Hence, the Dow dropped by around 300 points Wednesday before tumbling almost 1,000 points at Thursday’s open. Since a “correction” is usually defined as a decline of 10% from a recent high, the Dow Jones officially meets that definition.
The Dow wasn’t the only American stock market to begin a correction Thursday. The Nasdaq Composite also completed a 10% decline from a recent high. It fell by over 200 points at opening, hitting a bottom of 8,626. As with the Dow, this represents a 12% fall from the recent record high.
So yes, the market has effectively decided that recent highs were based on false premises. Having seen the government’s counter-productive attempts to quell coronavirus fears, and having seen an usual “domestic” case of the virus in California, investors now believe the situation is much worse than first thought.
Market analysts and financial services companies agree that the stock market is set for even more pain.
On Thursday, Goldman Sachs predicted that the S&P 500 is likely to fall to 2,900 in the next few days. In other words, it will also enter a 10% correction from its recent high of 3,386.
It gets worse. Goldman Sachs also predicts that the 10-year Treasury yield will fall below 1%. It’s currently at a new all-time low of 1.25%, so if the coronavirus does spread further, Sachs’ forecast will almost certainly be confirmed.
If it is confirmed, this will mean that investors have lost faith in stock markets as reliable sources of capital growth. In turn, it will mean they’ve lost faith in the economy.
Goldman seems to think that the chances of a recession are now pretty high. At the very least, the bank is predicting 0% earnings growth for U.S. companies in 2020 if coronavirus spreads further. If the spread turns into a pandemic, it says U.S. company profits will shrink this year.
Goldman Sachs’ analysts suggest that companies exposed to global suppliers, markets and third-parties will take the brunt of this shock. As Goldman’s chief U.S. equity strategist David Kostin predicts:
Pandemic risk is real and our basket of firms that are domestically-oriented will likely outperform companies with a high share of foreign sales.
So expect things to get worse before they get better. And in the meantime, expect gold and other safe havens to rise.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:37 PM