The ongoing coronavirus crisis has made global equity markets schizophrenic and left investors wondering whether the huge pullbacks (such as today’s) are buying opportunities or a trap door to more losses.
Investors are asking how low can stocks go? MSCI Inc. has an answer: possibly 11% lower.
The index provider and data research company created a stress test based on a new macroeconomic model to help investors gauge the possible negative impact of COVID-19 on the markets. Its model posits that U.S. stocks could fall 11% in the near term from where they ended trading on March 3.
MSCI says "near term" could be anywhere from days to months, but less than a year.
The S&P 500 Index had already fallen 11% from February 19 (when it hit an all-time high) through March 3, meaning that equities could eventually drop 22% from the S&P 500’s recent pinnacle.
After a strong trading day on March 4, the S&P 500 ended today's trading down 3.4%, leaving it a little more than half of a percentage point above where it closed on March 3.
As laid out in the MSCI study, the virus has disrupted global supply chains and decreased consumption, causing supply-and-demand shocks that could cause a significant short-term decrease in GDP growth.
MSCI says a short-term shock would create a one-time drop in output followed by a return to a normal growth pattern. But long-term shocks to supply-and-demand could lead to persistently lower growth and wreak havoc on the future performance of equities.
As investors fret about all of this, they’re more likely to become risk-averse and demand a higher premium to compensate them for the additional risk they’re taking on.
“If they do so,” MSCI says, “they would discount future earnings more aggressively and lower companies’ valuations, affecting market prices.”