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<\/p>\nDavid Rosenberg is often considered a permabear, but that\u2019s not entirely true<\/p>\n
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Published: May 2, 2020 at 9:52 a.m. ET, By Andrea Riquier<\/p>\n
The economic aftermath of the 2008 financial crisis was so tepid it was referred to as the \u201cGreat Recession.\u201d In the wake of the coronavirus catastrophe, investors need to brace for the \u201cGreat Repression,\u201d which may be even uglier than the downturn of a decade ago.<\/p>\n
That\u2019s the takeaway from an analysis out Monday from economist David Rosenberg. Rosenberg is often considered a \u201cperma-bear,\u201d<\/a> but that\u2019s not entirely fair. He\u2019s had his optimistic spurts.<\/p>\n This just isn\u2019t one of them.<\/p>\n Read: No, China\u2019s economy hasn\u2019t gotten better. The implications could be more serious than investors realize<\/a><\/p>\n In the \u201cbase case\u201d for the U.S. economy, published by his firm, Rosenberg Research, the economy \u201creopens\u201d in May, in a staggered approach across industries and regions. There are \u201cperiodic setbacks in terms of COVID-19 case counts\u2026sufficient to make people less comfortable and confident about spending than they did prior to the crisis. A vaccine is not developed in this forecast, but treatment that alleviates the worst respiratory symptoms\u201d is developed within the next six months, he writes.<\/p>\n What does that mean for the economy and financial markets?<\/p>\n A 30% contraction in real gross domestic product in the second quarter, negative year-over-year consumer price growth for 5 quarters, and an unemployment rate of 14.2% by the end of 2020, averaging 13% throughout 2021.<\/p>\n The 10-year Treasury yield TMUBMUSD10Y, 0.602% sinks lower and lower each quarter, to 31 basis points by the fourth quarter, and averages 18 basis points throughout 2021. Yields fall as bond prices rise.<\/p>\n Investors in high-yield debt run for the doors, leaving those bonds more than 700 basis points more expensive than Treasurys at the end of this year.<\/p>\n Stocks hit bottom in the second quarter, with the S&P 500 SPX at 2,000, then start a \u201cslow recovery.\u201d But it\u2019s meager: the index averages only 2,600 throughout 2021. Put another way, Rosenberg assumes stocks sink 30% in the coming months, then spend most of the next 18 months grinding higher to valuations about 10% lower than today\u2019s levels.<\/p>\n Rosenberg also lays out a \u201cbest case,\u201d which depends on a vaccine or treatment emerging in the next six to 12 months. That outlook includes an unemployment rate averaging about 9% for the next two years, a stock-market bottom of 2,500 for the S&P 500 in Q2, and a cyclical low of 29 basis points for the 10-year note in 2021.<\/p>\n The \u201cworst-case\u201d scenario is grim. It involves no vaccine, no treatment, and a second wave coronavirus outbreak next winter that severely saps business and household confidence. In this outlook, the jobless rate hits 20% \u2014 and averages 17.5% through 2021.<\/p>\n Outright deflation takes hold. \u201cThink about what years of no pricing power is going to do to those corporate cash flows in the future,\u201d Rosenberg writes. \u201cEven government intervention is capable of suffering from the laws of diminishing demand. Japan is a classic template.\u201d<\/p>\n Even in this worst-case scenario, however, Rosenberg doesn\u2019t assume the U.S. Federal Reserve takes interest rates negative: the 10-year touches a low of 31 basis points in the fourth quarter and averages 19 throughout 2021, essentially the same as in his base case.<\/p>\n But there\u2019s a lot more damage done to the stock market. The S&P 500 bottoms at 1,800 in the second quarter and averages only 2,200 throughout 2021.<\/p>\n