We have had several pundits talk about potential risks and scenarios of falling markets going forward. How bad will the next crisis be? JPM delivers a rather grim outlook summarized in a few bullets according to their model:
- A U.S. stock slide of about 20 percent.
- A jump in U.S. corporate-bond yield premiums of about 1.15 percentage points.
- A 35 percent tumble in energy prices and 29 percent slump in base metals.
- A 2.79 percentage point widening in spreads on emerging-nation government debt.
- A 48 percent slide in emerging-market stocks, and a 14.4 percent drop in emerging currencies.
Add to the above JPM´s Marko Kolanovic and his view of poor liquidity in markets due to the shift away from active to passive management and market disruptions are a possible threat due to the fact market has reduced its ability to prevent and recover from large drawdowns.
Another warning was issued last week by the often bearish David Rosenberg from Gluskin Sheff. In summary he writes:
- The S&P 500 to make “double top” like it did in 2000 and 2007.
- Emerging market debt to hit 200% of GDP.
- Big US corporate debt maturity around the corner
- Bond yield curve inversion.
Below are the four charts showing their bearish stance.
Source: charts Gluskin Sheff via Business Insider
Despite recent bearish calls from several of the big investment banks, most risk indicators continue pricing risk in a complacent way. The Fear Index, VIX, is trading close to year lows.