Nouriel Roubini says the markets are not nearly done falling in this bear market. Get ready for another 20% swerve.

The S&P 500, an index of major publicly traded companies in the United States, is in free fall this year. It officially entered a bear market in June after falling more than 20% from its previous high in January. Although it has managed several small rallies since then, investors have warned that stocks overall are still down and the bear market likely still has months of life left to it. Nouriel Roubini, one of the few to accurately predict the crash of 2008, said Fortune market watchers shouldn’t expect.

With most bankers and economists predicting that a US recession is likely next year, stocks could fall further. Roubini, an NYU economics professor and former White House and Treasury official, was speaking to Fortune to mark the release of his new book, “Megathreats”, which paints a picture of the many economic challenges facing the world today.

“If this recession were to be between a regular variety of vanilla and the GFC [Global Financial Crisis]…then the markets would drop 40%,” Roubini said. Fortune in a recent interview. “Now it’s only down 20%, so we’re left with 20% more.” Most bankers and economists have so far congregated on a 20% drop as the most likely.

The seasoned economist is fully convinced that a recession is on the way, one potentially severe and prolonged enough to combine the worst elements of the oil shocks of the 1970s and the global financial meltdown of the late 2000s.

There is another possibility, he added, when asked about legendary investor Stanley Druckenmiller’s scenario that stocks would be “flat” over the next decade.

“We could be closer to a period like the one we had between 1973 and 1982, where stocks fell and were very, very low for a long time,” Roubini said.

Roubini was referring to the weak performance and near-zero growth of the US stock market in the 1970s, when the economy was rocked by stagflation – the colliding forces of slow growth and high inflation, which the time were triggered by a global energy crisis. crisis. Stagflation threatens to make a comeback in the next recession, and if it does, the market could enter a similar state of stagnation, according to Roubini.

“Stocks need to go much lower than the current level before flattening out,” he said, adding that market rallies following the financial crash of 2008 and the COVID-19 pandemic-induced recession 19 in 2020 should not affect the economy. rescue this time.

The long dip

Much will depend on how far the Federal Reserve goes to fight inflation, as investors continue to struggle with the central bank’s rapidly rising interest rates. The Fed approved its sixth interest rate hike of the year last week, taking the target benchmark federal funds rate to a range of 3.75% to 4%. Rates haven’t been at this level since 2008, but with the Fed’s job far from done, higher rates could drag the stock market down even further.

“A rise in rates from where they are at around 4.5% will produce a negative impact of around 20% on stock prices,” billionaire investor and hedge fund manager Ray Dalio wrote in a post on LinkedIn. in September. JP Morgan CEO Jamie Dimon also warned last month that the market could fall another “20% easily” from current levels, and could possibly plunge another 30% in the event of a “tough recession”. “.

Dimon’s prediction of a 20% market decline was also deemed “certainly possible” last month by Tobias Adrian, director of money and capital markets at the International Monetary Fund.

The stock market is cyclical and a decline during a recession is inevitable. What may matter more to investors is how long it takes for markets to recover, but if the next recession is as bad as Roubini says, it could be a long time before markets do not return to their previous highs.

In the aftermath of the 2008 stock market crash, the federal government was able to channel what was then an unprecedented fiscal stimulus package to support states and businesses, but Roubini warned that the US economy is unlikely to be able to resort to the same measurements. for the next recession given the government’s record national debt, which last month topped $31 trillion for the first time.

Roubini said stock market performance is not the most important economic factor for most Americans to consider, noting that the vast majority of stock market value is held by a small portion of high-income Americans. However, the risks of a prolonged market decline and the potential return of stagnation also led him to say that a “long-term crash” and a “variant of another Great Depression” could not yet be excluded.

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