- If the S&P 500 sell-off over coronavirus fears continues, stocks could fall into a bear market, Lori Calvasina of RBC wrote in a Thursday note.
- If stocks fall 10% and pessimism still remains, the S&P 500 could fall to the 2,700 range, a 20% drop, according to the note.
- After a 10% drop, “we think the market will be telling us that another growth scare has taken hold and that another significant leg down is looming,” said Calvasina.
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The S&P 500 could be barreling towards a bear market if coronavirus-related panic mounts, according to Lori Calvasina, head of US equity strategy at RBC.
If stocks continue to fall and investors are still pessimistic after a 10% drop, it raises the risk that the S&P 500 could fall to the 2,700 range, a 20% drop from 2020 highs, Calvasina wrote in a Thursday note to clients. A fall of that magnitude would be considered a bear market.
“If the S&P 500 resumes its decline and 3,050 doesn’t hold, we think the market will be telling us that another growth scare has taken hold and that another significant leg down is looming,” said Calvasina, adding that a drop of this nature is her worst-case scenario for the US equity market.
“We’ve seen several growth scares in the US equity market since the Financial Crisis,” Calvasina wrote, pointing to market events in 2010, 2011, 2015-16, and 2018. In those events, the peak-to-trough declines ranged from 14.2% to 19.8%, the note said.
Calvasina also plotted out a possible recession scenario for stocks, even though it is not in RBC’s forecast. If coronavirus were to tip the US economy into a recession, Calvasina would expect the S&P 500 to fall 24% to 32% from its recent peak.
“The drawdowns in the S&P 500 around the Tech Bubble and Financial Crisis were much larger, but we believe that any recession in the US is likely to be quick and mild, as we do not seen the same kinds of excesses in financial markets and the economy today that were present during those times,” Calvasina wrote.
Stocks have fallen all week as panic over the coronavirus grows. At the same time, bond yields have been pushed to record lows as investors flee to safe-haven assets. On Thursday, former Federal Reserve Chair Janet Yellen warned that the epidemic could throw the US into a recession.
The flu-like virus has killed more than 2,800 and infected more than 82,000, mostly in China. Still, the spread of the virus to other countries including South Korea, Italy, and Iran has sparked further fear that the outbreak could become a pandemic and hammer global growth.
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