One Wall Street firm thinks the coronavirus-roiled stock market could fall another 20% this year

Reuters / Cheryl Ravelo-Gagalac

• Research provider TS Lombard said Monday that the S&P 500 will fall below 2,000 in 2020. 
• That would mark a 20% drop from where the index closed on Friday, and about 40% from its all-time high reached in February.
• The firm sees more market declines amid the coronavirus pandemic because it doesn’t believe a V-shaped recovery is possible.
• TS Lombard also thinks there will be further economic pain in the third quarter after a brutal second quarter.
• Read more on Business Insider.

The stock market has a lot further to fall as the coronavirus pandemic continues on, according to analyst at TS Lombard. 

The research firm on Monday said that the S&P 500 will fall below 2,000 in 2020, marking a 20% drop from where the index closed on Friday. Such a decline would bring the index more than 40% below its all-time high of 3,386.15 reached on February 19. 

TS Lombard lowered its outlook for stocks because it doesn’t believe that a “V-shaped” recovery — indicating a swift rebound and strong snap-back momentum — is possible for the US, even after the coronavirus pandemic subsides. 

“The idea that Americans are simply going to snap back as if what’s going on had not happened suggests Wall-Street has ‘herd immunity’ to common sense,” analysts led by Charles Dumas wrote in the note Monday. 

An early sign of pain to come was last week’s jobs numbers, according to Dumas. On Friday, the March nonfarm payrolls report showed that the US had lost 701,000 jobs during the month. The fact that the losses were so much deeper than the 100,000-job contraction forecasted by economists suggests that damage may be more widespread than originally thought, he said.

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“There is worse to come, hard though that may be to imagine,” Dumas wrote, adding that labor income could fall through the second quarter and the third. This conflicts with the V-shaped recovery that many economists have predicted.

“The world will not just snap back to normal,” he wrote. “Leaving aside the ‘how’ and the ‘when’ of any return to normal from the current lock-down, people are said going to be the same.”

Further, Dumas notes that, at the end of 2019, US households had more assets in the stock market than their own houses. He says those assets have since been cut by a third. 

Small businesses will also likely struggle to stay afloat amid the coronavirus-induced recession, according to Dumas. These “mom and pop” shops are the backbone of the economy, Dumas said.

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“A little bit of government help may tide them over, of course – but who would bet that cutbacks in capex do not get triggered sooner than with the usual lag of six months or more?” Dumas wrote, adding that the Philadelphia Fed survey of capital expenditure intentions was slumping before COVID-19 hit the economy hard. 

Aside from potential cuts in spending, “the first call on any revival of business cash flow will be to pay back whoever has tided them over – not much will be left for dividends even, let alone capex,” said Dumas. 

Overall, the situation is a “stock market in denial, very far from any sign of capitulation,” according to Dumas.

He concluded: “The second leg down of this bear looks as if it will be worse than the first … and always, the last leg down hurts most.”

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