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Market Insider: 3 Reasons the S&P 500 Could Be Headed for a 48% Drop

December 22, 2020
Image for Market Insider: 3 Reasons the S&P 500 Could Be Headed for a 48% Drop

Article by Emily Graffeo in Market Insider

The S&P 500 could be headed for a drop of up to 48%, according to James McDonald, the CEO and chief investment officer of Hercules Investments.

In a recent note to clients, McDonald, who profited from the pandemic crash in March with bullish wagers on stock-market volatility, laid out three reasons the market is especially vulnerable to such a swift downturn right now.

1. A new strain of COVID-19 in the UK

The perceived future harm of the new COVID-19 strain in the UK will introduce additional risk to markets, according to McDonald. 

"The new strain is one of many potential catalysts that can shift sentiment and trigger violent selling, especially as stocks hit record highs as recently as Friday," McDonald said.

2. Historically elevated tech valuations

McDonald said recent valuations in the technology sector exceeded levels in the days and weeks before the major market crashes of 1929, 1987, 2001, and 2008.

"The idea that tech stocks should keep rising in the face of the Covid-induced headwinds was an idea rooted in historic optimism," he said. "As we see now, eventually reality strikes and changes things overnight."

3. The stimulus package isn't enough to offset the economic fallout of COVID-19

The $900 billion stimulus package is necessary and was largely expected by investors - but it won't be enough to limit the economic fallout of the pandemic, according to McDonald.

Given these circumstances, McDonald said, the S&P 500 could crash to 1,900 if investor sentiment suddenly turns negative. The Dow Jones industrial average could drop to as low as 15,000, a roughly 50% drop from current levels, he added.

Markets have always crashed in ....

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