NEW YORK (Reuters) – The coronavirus shockwaves rippling through U.S. stocks are forcing investors to contemplate outcomes more dire than a recession, including several quarters of declining economic activity, a credit crisis or even a depression.
The rising global toll from the pandemic and the uncertainty over how far it may spread has left investors and economists scrambling to gauge the financial fallout.
“This market looks like it has already priced in most of a garden variety recession,” said Frances Donald, global chief economist at Manulife Investment Management. “It is now on top of that having to price in some probability of a credit crisis.”
Forecasters at Goldman Sachs and other banks are now projecting a steep economic contraction in at least the second quarter as governments in the United States and Europe start shutting restaurants, closing schools and calling on citizens to stay home.
But there is hope among some economists that economy will start expanding again later this year — depending in part on efforts to contain the virus, known as Covid-19.
The S&P 500 on average has fallen 28% from peak to trough during recessions, according to an analysis of the past 70 years from Keith Lerner, chief market strategist at Truist/SunTrust Advisory Services. As of Monday’s close, the benchmark index had declined 29.5% from its Feb. 19 closing record high.
But the market’s plunge was much deeper over a decade ago during the financial crisis, with the S&P 500 tumbling more than 50%.
“A 2008-like financial contagion is not yet priced into this market,” Donald said, but she added the market “probably won’t have any reassurance that we have avoided that 2008-type scenario completely until we see a calming of credit spreads and the pace of Covid-19 cases starts to decline.”
Stocks crumbled anew on Monday a day after the Federal Reserve took emergency action designed to cushion the economy, using tools similar to those the central bank deployed to help the country emerge from the 2007-2009 financial crisis.