With the Dow Jones Industrial Average having violated the psychologically important 20,000 level on Wednesday amidst another bruising coronavirus fueled crash, some top strategists on Wall Street are sharpening their pencils once again on where the bottom may be for Blue Chip equities.
For Hercules Investments CEO James McDonald — who correctly predicted a major bear market on Yahoo Finance’s network more than a month ago in the early stages of the coronavirus outbreak — he thinks another 30% downside risk to stocks is very possible. Specifically for the Dow, McDonald thinks hitting 15,000 from current levels of just under 20,000 is in sight.
“We have moved to cash,” McDonald said on Yahoo Finance’s The First Trade. That’s a slight shift in strategy for McDonald from a few weeks ago where he was actively buying volatility for clients.
McDonald continued, “We believe that a normal valuation for a crisis of this magnitude still brings us down another 30%. I think there is a new risk in the market not a lot of people are talking about. If Donald Trump loses the confidence of the public and Joe Biden strengthens, there will be an introduction of uncertainty around the next presidency. The regime change must take us back below pre-Donald Trump levels, that is a Dow of 17,000, 16,000, 15,000.”
Well, that appears to be happening as former Vice President Joe Biden has solidified himself as the Democratic nominee for president and Trump bungles through handling the coronavirus response. And from an economic standpoint, with a U.S. economy that has ground to a halt due to social distancing and quarantines — bearish calls from McDonald look prudent.
Deutsche Bank’s global economics team came out Wednesday morning calling for the U.S. GDP to crash 13% on an annualized basis in the second quarter. To put that into perspective, Deutsche Bank notes the rate of decline would be more than one and a half times the sharpest contraction during the 2008-2009 financial crisis (an 8.4% annualized plunge in the fourth quarter of 2008).
Sounds like a Dow 15,000 type of backdrop.