“It’s going to be messy because we’ve basically lost all our
anchors,” Mohamed El-Erian said.
Brace yourself. After losing 12% in the last
10 trading days, the S&P 500 fell 7% at the opening, triggering trading
curbs as fears of fallout from the spreading coronavirus reached fever pitch
and Saudi Arabia started an oil price war with Russia.
Economist Mohamed El-Erian, speaking on
CNBC early Monday, said the U.S. stock market may decline 20-30% from
February’s record highs.
“This is going to be treacherous for a while.
I would advise most retail investors to stay on the sidelines, not panic. There
will be opportunities but they’re not now,” the chief economic advisor at
Allianz said on “Squawk Box.”
“It means a 20%, 30% drop in prices” from
the Dow Jones Industrial Average’s Feb. 12 record, he added. The Dow, as
of Friday’s close, was 12.5% off those all-time highs.
Pointing to what is causing the market mayhem,
he explained: “It’s going to be messy because we’ve basically lost all our
anchors. We lost the economic anchor with the coronavirus. We’ve lost the
policy anchor with people losing confidence in the Fed’s ability to turn things
around. And over the weekend, we lost a market anchor with OPEC” [not reaching
a production deal].
On Monday, thehe yield on the benchmark
10-year Treasury note dropped below 0.5% for the first time ever, while the
30-year rate breached 1%. Oil was down 19% at 10 a.m. Monday. Over the
weekend, Saudi Arabia cut prices 10% cut in retaliation for Russia’s refusal to
join OPEC members in large production cuts.
“Panic has engulfed financial markets,” wrote
economist and money manager Gary Shilling on Friday even before the latest
price dives. “Fear of the spreading coronavirus is obviously driving these
markets, much as consumers are cleaning out stores of food, disinfectants and
paper towels. … With consumer and business retrenchment and worldwide
supply chain disruptions, the global recession we’ve been anticipating is
almost certain. … It doesn’t take much of a shock to send an already slow
and slowing global economy into negative territory.”
Joachim Fels, Pimco’s global chief economic
advisor, also foresees a “distinct possibility” of a “recession in the U.S. and
Europe, but only during the first half of the year, as the coronavirus outbreak
crimps demand and supplies,” according to a note to clients reported by
Bloomberg. He bases his expectation of a short-lived economic drop on the
assumption that the virus outbreak will peak in the next two months, but that
is not the assumption of any leading health authority in the U.S. or overseas.
Goldman Sachs strategists led by David Kostin
say the U.S. economy could slip into recession if “the contagion lasts
for an extended period of time,” causing the S&P 500 to drop another 18% to
2,450.
These fears of an extended, dramatic fallout
from the effects of the spreading coronavirus coupled with the markets’
reaction is leading some economists and strategists to entertain the idea of
zero interest rates in the U.S.
“I would not be shocked if we went to zero,”
said Katy Kaminski, chief research strategist and portfolio manager at the
AlphaSimplex Group, an affiliate of Natixis, about U.S. interest rates.
Former Federal Reserve Chairman Alan Greenspan
concurs, telling a Bloomberg reporter Friday, “There’s really not a limit on
how low the yield can go, even zero is not a limit. A negative rate is
possible,” said Greenspan, referring to the yield on the 30-year Treasury bond,
whose yield fell to a record low 0.97% Sunday night.
The bond market is also expecting a run
to near-zero rates in the short end of the yield curve. The CME FedWatch tool
on Sunday night gave 61% odds of a 100-basis point cut in the federal funds
rate at the central bank’s next policy meeting on March 17-18. The FedWatch
tool had 39% odds of a 75 basis point cut.
Such a move would follow the Fed’s surprise 50
basis point cut on Tuesday, March 3, which failed to calm financial markets.
Early Monday morning the New York Fed announced it will The increase the size
of this week’s overnight and term repurchase operations, according to Bloomberg.
“The real crisis that we’re facing right now
is a crisis of interconnectivity where we have systems that are very fragile
and we didn’t realize how fragile they were,” said Kaminiski at a recent
luncheon.
When travelers cancel travel plans, for
example, airlines, hotels and ride-sharing services suffer, Kaminski
said. In such an environment any stress can weigh on liquidity, credit and
leverage, he said, noting that airline stocks have been especially hit hard by
the impact of the coronavirus.
Fels, too, worries about liquidity in the
market and advises investors to be cautious about risk assets, including
high-yield bonds, and focus on liquidity and capital preservation since central
banks have less ammunition to draw.
Shilling takes a much more pessimistic view of
risk assets like stocks. “With the prospect of a deep recession slaughtering
corporate profits and spawning deflation, we believe any stock rally is a
selling opportunity just as any Treasury bond price declines should a buying
opportunity.”
— Janet Levaux contributed reporting.
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