- A range of factors weighing on the global economy prompted comparisons with 2008, with dire forecasts for equities.
- Credit Suisse briefly jolted markets on fears of a slump, sparking anxiety over another Lehman Brothers moment.
- Here’s how badly the next downturn could hit the stock market, according to five leading experts.
As recession fears mount on Wall Street and inflation remains well above the Fed’s 2% target, some of the world’s top market, business and economic commentators have probed just how they think the next downturn could be – and how far stocks may have to fall.
The stock market cratered from 2008 to 2009, with the Dow Jones Industrial Average ending at a low of 6,594 in March 2009, down more than 50% from its pre-recession high. While the Great Recession was likely a confluence of once-in-a-lifetime events, the next economic downturn doesn’t have to be so outlandish to trigger a massive stock market decline, and there’s a lot that’s already making investors pretty nervous.
On the one hand, the US central bank is poised to hold rate hikes until “the job is done,” Fed Chairman Jerome Powell said, indicating the Fed could withstand a recession. if that meant prices falling off multi-decade highs. Some forecasts say the Fed won’t pivot until late next year, which means more pain for stocks and more economic uncertainty ahead.
So far in 2022, the S&P 500 has fallen more than 20% and Credit Suisse briefly jolted markets over fears of a meltdown, setting off a wave of panicked comparisons to the Lehman Brothers bankruptcy that sparked the Great Recession.
US bonds, meanwhile, are also showing signs of strain. Yields on 2-year and 10-year Treasuries remain sharply inverted, and a growing chorus of pundits has warned of a malfunction in the Treasuries market that could prove to be a systemic risk.
As the warning signs mount, here’s what five experts have to say about the coming recession and what’s in store for the stock market.
Nouriel Roubini, Emeritus Professor of Economics at the Stern School of Business
Roubini, who earned the nickname “Dr. Doom” as one of the pundits for calling the Great Recession, warned that an even more severe downturn could be in store in the United States that would combine the characteristics of stagflation. of the 1970s and the debt crisis of 2008. to usher in a Frankenstein-like macro-storm.
The economist predicted that inflation will remain too high for the Fed to contain, and will prompt central bankers to “crash” on the rate hike. Stagflation and a heartbreaking recession could ensue, and high debt balances at financial institutions could lead to a stock market crash, Roubini said, pointing to Credit Suisse’s recent troubles as an omen.
“This is just the beginning of this pain,” Roubini said of a potential repeat of the 2008 recession. “Wait until it’s real pain.”
In his view, stocks could fall as much as 40% from current levels – almost on par with the 2008-2009 freefall.
David Rosenberg, economist and head of Rosenberg Research
“I feel like I’m reliving the summer of 2008,” Rosenberg said in an op-ed for MarketWatch in May, warning that the S&P 500 could fall another 17% before revising up to 27% this month. .
“The stock market is following a similar bear market pattern in a recession,” pointing to 2008 when stocks fell 17%, rallied briefly, then plunged 40% as the recession unfolded.
In his opinion, the current market rout has not yet found a bottom.
“You haven’t seen anything yet. All the bad things are ahead of us because of the delays. Next year will be the year we have financial spasms.”
Jamie Dimon, CEO of JPMorgan
Dimon spooked investors in a recent prediction that the United States would enter a recession within the next six to nine months and cause stocks to fall “a mere 20%”. But this accident will not be as bad as in 2008, he said in an interview with CNBC.
“In fact, the US economy is still doing well. Consumers have money, they are spending 10% more than last year, their balance sheets are in very good shape. Yes, the debt has increased a little, but not close to pre-COVID levels. So even if we go into a recession, they’ll be in much better shape than they were in 2008 and 2009. Businesses are in good shape. Credit is very good,” said Dimon said.
The investor “The Big Short”, Michael Burry
Burry, who is best known for his bet against the US housing market before the Great Recession, sparked alarms on Twitter when he suggested an impending crash could be even worse.
“Today I wondered out loud if this could be worse than 2008. What interest rates are doing, exchange rates globally, central banks seem to be reacting in CYA mode” , he said in a since-deleted statement. Tweeterreferring to the acronym “cover your ass”.
Burry has been a frequent doomsayer, posting terrible tweets and then often deleting them. He compared the current decline in stocks to the start of the dot-com crash and said he thinks the market still has a lot to fall.
Mohamed El-Erian, Chief Economic Advisor of Allianz
A looming recession is unlikely to be as severe as in 2008, chief economist Mohamed El-Erian said — but that assumes the Fed can avoid more policy mistakes.
The famed economist sharply criticized the Fed’s late response to inflation, which prompted an aggressive wave of rate hikes this year from central bankers. The Fed’s actions could overtighten the economy and potentially trigger a “damaging recession”.
He expressed concerns about financial stability, warning markets that the Fed could “break something” on the way to reducing inflation.
“There are fears that this acceleration in rate hikes – and [the Fed is] massive frontloading – will break something in the financial system. And if the Fed is slowing down, it’s because we have financial stability issues,” El-Erian said, urging investors to prepare for “troublesome volatility.”
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