After sharp falls, stocks may still have more downside

Markets fell sharply last week as the COVID-19 coronavirus outbreak expanded globally.

The S&P 500 plunged 11.5 percent last week, putting it in correction territory.

While some investors may be tempted to buy stocks after the decline, BK Asset Management’s managing director of FX strategy Boris Schlossberg said that buying the dip could get very nasty for investors.

“If you have a couple of failed buy-the-dip situations going forward this year, it’s going to really create a very sour sentiment and you’re going to have much steeper declines than people believe,” he said.

Schlossberg added that the drop in earnings estimates could be “much worse than people think.”

Craig Johnson, senior technical research analyst at Piper Sandler, said that while he thinks the secular bull market is intact, “market internals have gotten weaker, and we continue to see some of our proprietary market timing gauges flip into sell positions, so this can be a little bit more downside that’s going to have to get played out”.

Similarly, Wharton School professor Jeremy Siegel said that the coronavirus outbreak is “a very severe one-year shock” but added that the subsequent bounce back “could be extremely rigorous”.

Even more optimistic is Thomas Lee, founder of Fundstrat Global Advisors. Lee said in a research report on Friday that “markets are bottoming this week”.

Both Siegel and Lee think that a Federal Reserve rate cut could help markets but Paul R La Monica at CNN thinks it will have little impact on the economy.

He wrote last week that “rate cuts, tax cuts and other stimulus won't stop a virus and the ultimate economic impact it will have”.

“There is all kinds of evidence on epidemics to suggest that we will get through this. But no amount of monetary or fiscal stimulus will have any effect whatsoever,” KC Mathews, chief investment officer of UMB Bank, was quoted as saying.