Wall Street Warns: More Pain Still to Come

Despite his hopes to have the country operating normally by Easter, President Trump announced in a press conference last night that he is extending the social distancing mandate until April 30, and now hopes the country will be on the road to recovery by June 1.

That’s going to put additional pressure on an already struggling economy as restaurants, retailers and other businesses stay shuttered for even longer.

And despite last week’s dramatic rally in stocks, many on Wall Street are saying that things are going to get much worse before they get better, and are expecting further declines in the market.

Goldman Sachs’ U.S. chief equity strategist David Kostin wrote in a recent note to clients that “bear markets are often punctuated by sharp bounces before resuming their downward trajectory.”

Kostin says there were six distinct rallies of 9% or more between September 2008 and December 2008 during the financial crisis.

“Most bounces involved optimism around monetary or fiscal policy support. However, the market low did not occur until March 2009, when the pace of economic contraction began to slow,” Kostin added.

John Velis, a currency and macro strategist for the Americas at BNY Mellon, agrees that there could still be plenty of downside left in the markets.

“COVID-19 infections in the United States are still growing in number and we are not close to the peak of ‘the curve.’ Indeed, one could argue the worst is yet to come on the public health front, and this could entail ever more pain on businesses and employees — and the market.”

Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, also believes the market is still searching for a bottom.

“This analysis continues to keep us concerned that the U.S. equity market hasn’t found a bottom yet. It also reminds us that after the most severe equity market drawdowns, durable bottoms have taken time to form – something we think will be the case this time around as well. We are growing increasingly skeptical about the V-shaped recovery thesis in stocks. In particular, we are concerned that there has been too little discussion about the longer-term collateral damage from the public health crisis.”

Mohamed El-Erian, the chief economic adviser at Allianz, said in a Bloomberg op-ed article last night that even with last week’s rally he expects stocks to resume their slide.

“I fear that this is more likely to prove a temporary exception to what, unfortunately, is still an outlook for high stock market volatility around a still-downward trend.”

And economist Nouriel Roubini, known as “Dr. Doom” said in a recent tweet to “beware of bear market “head fake” rallies. The market can't truly Bottom till the Virus tops & the rate of increase of new cases is sharply down.”

This isn’t to say investors should sit on their hands and do nothing until the market drops further. If you have a long-term outlook and can average into positions over time, adding a bit here makes sense while waiting to see which direction the market goes. If it drops further, you’ll have the chance to add more at even lower prices. And if the market rallies, today’s prices will seem cheap.