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Coronavirus outbreak could easily tip US into a recession: Goldman Sachs

Brian Sozzi
Editor-at-Large

A sickened stock market could become even more feeble thanks to the coronavirus, strategists at Goldman Sachs warn.

“The U.S. economy could slip into a recession if the coronavirus contagion lasts for an extended period of time,” said Goldman Sachs strategist David Kostin in a new note to clients. Should a U.S. recession transpire, Kostin sees S&P 500 earnings diving 13% and the index plunging about 18% from current levels.

Kostin is holding out hope the U.S. averts a recession, however. In a baseline scenario, Kostin thinks S&P earnings will be flat in 2020 and the index will rally 15% or so to 3,400.

Indeed, that expectation by Kostin looks like wishful thinking at the moment.

This weekend, Italy quarantined some 16 million people — a quarter of its population — in a bid to stave off a broader spreading of the coronavirus. As of March 8, there were 446 confirmed cases of the coronavirus in the U.S. including the first cases in Washington, D.C. A total of 19 people have died from the coronavirus in the U.S. Several U.S. states have declared states of emergency in a bid to get government assistance to fight the coronavirus.

People wear masks as they walks inside Vittorio Emanuele II gallery, in downtown Milan, Italy, Sunday, March 8, 2020. Italy announced a sweeping quarantine early Sunday for its northern regions, igniting travel chaos as it restricted the movements of a quarter of its population in a bid to halt the new coronavirus' relentless march across Europe. (AP Photo/Antonio Calanni)

There are now 107,954 confirmed coronavirus infections globally and 3,666 deaths. Both figures have continued to rise despite what appears to be a peak in infections in China where the disease commenced.

‘Impact on global economy’

Meanwhile, the stock market continues to be highly sensitive to coronavirus headlines and trade with a downward bias.

The S&P 500, Nasdaq Composite and Dow Jones Industrial Average all traded below their 50-day moving averages. Only the Nasdaq is holding above its 200-day moving average — surprising in the sense tech giants from Apple (AAPL) to Microsoft (MSFT) have warned of a coronavirus financial hit. The CBOE Volatility Index — known as Wall Street’s fear gauge — briefly touched a multi-year high of 50 on Friday.

Gorilla Trades notes short interest on the NYSE continued to climb last week, despite the Federal Reserve’s emergency 50 basis point rate cut.

“When it comes to the markets, we really don’t care how bad the coronavirus is compared to other pandemics in history. Yes, we care very much about the human toll it’s taking…it’s a horrible tragedy. However, we do not care how much better or worse it is compared to the SARS outbreak, H1N1 or the Ebola virus when it comes to analyzing the markets. All that matters right now is that it IS having a BIG impact on human behavior!  That, in turn, IS having a big impact on the global economy…and the longer it lasts, the worse it will get,” said Miller Tabak strategist Matt Maley.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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