ASX: Analysts' grim warning for stock market amid coronavirus shutdown

The economy could be heading to a recession “greater than anything seen in the post-war period” as reality dawns on investors.

The prevailing view shared by financial commentators was the coronavirus-induced crisis would lead to an aggressive but temporary slump in stock markets and then snap back in a matter of months.

But this has changed.

As the population retreats inside during the government-enforced lockdown, workers at pubs, clubs, gyms, restaurants, cinemas, construction sites and airlines have had their employment plunged into doubt, crippling the economy and threatening a deep recession.

The ASX200 is more than 2 per cent higher today but, in just a month, has lost about 35 per cent of its value. A massive dent in any language, but the falls are expected to plunge further until the spread of the pandemic shows any sign of plateauing.

“The concern now is people are looking at that Q2 (second quarter of the year) globally and it's going to be one of the biggest contractions we've ever seen,” Pepperstone head of research Chris Weston told news.com.au.

“But are we going to get that aggressive snapback that the play book is set on?”

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JP Morgan has predicted the nation’s economy in the second quarter to retract by nearly 10 per cent, which it says would lead to an unemployment rate of 11 per cent.

It also comes after a senior Federal Reserve executive warned unemployment in the United States could hit 30 per cent, worse than during the Great Depression and three times the level during the global financial crisis.

That could lead to an unprecedented 50 per cent drop in GDP or a $US2.5 trillion hit to the world's largest economy with the hope it would recover in the next quarter.

“But when you're talking about that level of unemployment, you've got to hope that the social fabric of society holds up because there’s going to be a whole lot of economic pain,” Mr Weston said.

He says the knock-on effect of plunging stocks will drag on other asset classes such as housing as investors are forced to liquidate.

“The more that these financial markets continue to tighten, the more people are going to feel less wealthy,” Mr Weston said.

“The people who lose their jobs are clearly not going to go out spending, and the people who have got a job are going to feel less wealthy because the markets continue to crash by significant amounts every day.”

Unemployment is now forecast to plunge as the economy grinds to a halt. Picture: Bryan R. Smith / AFP

AMP chief economist Shane Oliver said the reality of the destructive sell-off was beginning to dawn on investors.

“We could end up with a slump in GDP which could be greater than anything seen in the post-war period, greater than the recessions of the early ’90s and early ’80s,” he told news.com.au.

“The more it (GDP) goes down the more you worry there will be damage to the economy which goes beyond the virus.”

DRAMATIC VOLATILITY

Friday’s result ended a run of 10 consecutive days of moves higher or lower of 3 per cent or more, punctuating the dramatic risks to growth as a result of the pandemic.

“It means volatility and uncertainty is very high,” Mr Rodda says.

“You get the biggest rally in bear markets (an index that has lost 20 per cent from its peak to trough).

“Higher volatility just means the prices move more, and that doesn’t mean just for the downside.

“Any move in either direction is going to be incredibly exaggerated, so we’re still a very wild market at the moment.”

CMC Markets chief strategist Michael McCarthy said this long run of dramatic moves illustrated the current “destruction of demand and disruption of supply chains”.

“A 10 per cent rise can be just as concerning as a 5 per cent fall,” he told news.com.au, explaining the volatility of the outbreak is “extremely worrying” for the economy.