Goldman Sachs warns clients that the S&P 500 may be at 2,000 by the first half of the year, marking a 41% drop from record highs set just one month ago. The Wall Street bank expects stocks to recover quickly by the end of the year.
"Coronavirus has created outstanding economic and social disruption," Goldman Sachs strategists wrote in a note to clients Sunday.
A bottom of 2000 in the S&P 500 would mark a 26% drop from Friday's close. And that would result in a decline of about 16% from Monday's close of 2,386 after another violent day of sales which in turn forced to stop trading.
Lori Calvasina, head of US equity strategy at RBC Capital Markets, recently wrote in September and early October 2008, says Lori Calvasina.
US stocks plunged 57% during the 2008 crisis
Investors are increasingly pricing the risk that the United States is in a recession due to the coronavirus pandemic.
"This may be a fixed bear market like in 1987. However, this time around is likely to be a short recession," Ed Yardeni, president of investment adviser Yardeni Research, wrote in a Monday card for clients.
During the 11 recessions since World War II, the S&P 500 suffered an average top-to-bottom decline of 30%, Goldman Sachs said. However, US equities fell significantly more during the last two downturns as the company's earnings crater.
The S&P 500 lost 49% of its value after the tech bubble burst in 2000. And the index was down by as much as 57% during the 2008 financial crisis.
It is incredibly difficult to precisely put a bottom in stocks. Retail investors should not bother to try to do so because even professionals admit they are not secure.
"Precision is difficult in an unstable market with daily price fluctuations of +/- 5% and a VIX level of 75," noted Goldman Sachs strategists.
Is the capitulation reached? Maybe not
Market confidence has obviously eroded, but perhaps not as much as is necessary to indicate that a bottom has been reached.
RBC said institutional investor sentiment, measured by asset manager positioning in US stock futures, has dropped significantly, but remains well above the lows in December 2018, March 2009 and other recent market threats. Although this measure fell by another 30%, it will still be above market bottoms, RBC said.
In the same way, retailer investor equity cannot be faded.
The gap between bulls and bears in the American Association of Individual Investors (AAII) survey has dropped to -21.6%, RBC said. But it fell to – 26.5% in August 2019, -28% in December 2018, and – 51.4% during the financial crisis.
"The sentiment has gotten worse, but not enough to suggest that both camps have surrendered," Calvasina wrote. "The sentiment data told us it was still too early to call a bottom in the S&P 500 or an end to the stock market's recent extreme volatility effort."
Revenue may fall sharply
Goldman Sachs has downgraded its earnings forecast per share for the S&P 500 twice in two weeks and now expects "extreme weakness" to peak at a 15% decline in the second quarter. However, Goldman expects rapid earnings that will propel stock prices later in 2020.
"The lesson for past event-driven bear markets is that financial destruction eventually allows a new beef market," Goldman Sachs strategists wrote.
For example, the S&P 500 fell by 19% following the Russian government debt default in 1998. But shares than ripped 28% higher over the next six months.
A similar rebound happened in 2011 after US stocks fell 19% during the European debt crisis. That gave way to a 29% improvement in six months.
3,200 by the end of the year?
A backlash later in 2020 could be helped by extreme steps taken by global central banks to restore confidence and keep markets functioning.
"There is nothing the Fed can do with the viral pandemic. But these moves should help calm the fear pandemic in the financial markets," Yardeni wrote.
Goldman Sachs predicts that the S&P 500 will rocket back to 3200 by the end of 2020. That will amount to a 60% increase from what was expected in 2000. Attach the seat belts.