Recession Fears Rise as Stocks and Oil Plummet

Brace yourself for more extreme volatility in financial markets. Stocks are cratering along with oil and bond yields and by mid-morning Monday there was no end in sight to the mayhem.

After losing 12% in the last 10 trading days and falling 7% at Monday’s market open, which triggered trading halts, stocks resumed trading at sharply lower levels, down 5% to 6%.

Oil prices recovered about half their early Monday 30% loss, which followed the first salvo in a Saudi-Russia oil price war, a 10% cut in oil prices by Saudi Arabia. Ten-year Treasury yields hovered around 0.5% after falling as low as 0.32% in overnight trading. Both are well below the Fed’s current 1%-1.25% short-term federal funds rate.

Economist Mohamed El-Erian, speaking on CNBC early Monday, said the U.S. stock market may decline 20-30% from February’s record highs.

“This is going to be treacherous for a while. I would advise most retail investors to stay on the sidelines, not panic. There will be opportunities but they’re not now,” the chief economic advisor at Allianz said on “Squawk Box.”

“It means a 20%, 30% drop in prices” from the Dow Jones Industrial Average’s Feb. 12 record, he added. The Dow, as of Friday’s close, was 12.5% off those all-time highs.

Pointing to what is causing the market mayhem, he explained: “It’s going to be messy because we’ve basically lost all our anchors. We lost the economic anchor with the coronavirus. We’ve lost the policy anchor with people losing confidence in the Fed’s ability to turn things around. And over the weekend, we lost a market anchor with OPEC” [not reaching a production deal].

Goldman Sachs strategists led by David Kostin are even more bearish. They note that, while their base case is that the virus’ impact will be widespread but short-lived and the S&P 500 will rise by year-end, “if the contagion lasts for an extended period of time, the U.S. economy could slip into recession and the S&P 500 would fall to 2,460 (-18%).”

“Panic has engulfed financial markets,” wrote economist and money manager Gary Shilling on Friday even before the latest price dives. “Fear of the spreading coronavirus is obviously driving these markets, much as consumers are cleaning out stores of food, disinfectants and paper towels. …  With consumer and business retrenchment and worldwide supply chain disruptions, the global recession we’ve been anticipating is almost certain. … It doesn’t take much of a shock to send an already slow and slowing global economy into negative territory.”

Joachim Fels, Pimco’s global chief economic advisor, also foresees a “distinct possibility” of a “recession in the U.S. and Europe, but only during the first half of the year, as the coronavirus outbreak crimps demand and supplies,” according to a note to clients reported by Bloomberg. He bases his expectation of a short-lived economic drop on the assumption that the virus outbreak will peak in the next two months, but that is not the assumption of any leading health authority in the U.S. or overseas.

These fears of an extended, dramatic fallout from the effects of the spreading coronavirus coupled with the markets’ reaction is leading some economists and strategists to entertain the idea of zero interest rates in the U.S.