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‘Buy The Dip’ Says Analyst, Shilling Warns of 40% Correction

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‘Buy The Dip’ Says Analyst, Shilling Warns of 40% Correction

We’ll see higher markets in 12 months. This is according to the analyst who correctly predicted the devastating impact the coronavirus would have on the financial markets. However, veteran investor Gary Shilling says history shows that we should brace for a 40% drop in stock prices.

For a bit of context, back on February 28, BCA Research chief global strategist Peter Berezin predicted a 20% correction in the stock market due to the coronavirus pandemic, saying, “such a pandemic would rattle the global economy, leading to a recession as deep as the one in 2008/09. Demand for most items other than necessities would collapse. Business and leisure travel would fizzle. The global supply chain would seize up.”

Now, Berezin and his colleagues at BCA are back with their outlook for the third quarter. He says there is “little appetite” for another lockdown even if the number of new coronavirus cases surge. He also mentions that investors should buy any dip in the stock market.

“We would ‘buy the dip’ if global equities were to fall 5% to 10% from current levels. While the pace of reopening will slow, there is little appetite for the sort of extreme lockdown measures that were implemented in March, says Berezin. “The U.S. Congress will ultimately extend fiscal support for households and firms. Around the world, both fiscal and monetary policy will remain highly accommodative, which should provide a supportive backdrop for stocks.”

Predicting Q3

BCA’s outlook for the Q3 includes:

  • The group expects to see a rising number of new coronavirus cases. However, the use of masks and other safety measures will help the medical community stay on top of the outbreak and we will avoid an economic shutdown. “We are unlikely to see the sort of broad-based economic dislocations experienced in March.”
  • Financial stimulus to help those affected by the economic shutdown will continue. This is despite concerns that some Americans are earning more money from unemployment benefits than they were when working. “Politically, stimulus remains very popular,” the analysts wrote. “Unlike during the housing bust, there has been little moral hand wringing about bailing out households and firms that ‘don’t deserve it.’”
  • The virus will continue to disrupt industries. Also, “considerable near-term dislocations, particularly for airlines, hotels, commercial real estate operators and developers, and associated lenders to these sectors” will exist.
  • Expect higher stock prices in 12 months. These will come due to monetary stimulus and trillions of dollars of “cash on the sidelines” waiting to reenter the market.

In stark contrast to BCA’s outlook is veteran investor Gary Shilling, who says we need to brace for a drop of as much as 40% in stock prices.

“Stocks are [behaving] very much like that rebound in 1929 where there is absolute conviction that the virus will be under control and that massive monetary and fiscal stimuli will reinvigorate the economy,” the Shilling also says. He adds, “I think we’ve got a second leg down and that’s very much reminiscent of what happened in the 1930s where people appreciate the depth of this recession and the disruption and how long it’s going to take to recover.”

Shilling says stocks could decline 30-40% from here, and “that could be optimistic.”

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