(Bloomberg) -- With trillions lost and volatility everywhere, U.S. stocks are tracing a path disturbingly close to the 2008 playbook. If the pattern continues, it may mean two more weeks of pain to come.
The S&P is likely headed toward 2,000 over the next 14 days, according to Nicholas Colas, co-founder of DataTrek Research, unless fiscal stimulus from Washington comes faster than it did during the crisis.
It sounds extreme but is the view of someone who has gotten other aspects of this episode right. Before Friday’s surge, Colas prepped clients for an immediate and sharp bounce following near-historic readings in the Cboe Volatility Index, also known as the VIX. The S&P 500 then surged 9.3% in its best day since 2008. Now he’s cautioning against further declines.
“The 2008 playbook relates to how markets behave when government appears gridlocked in the face of a crisis,” Colas wrote to clients Monday. “Friday’s rally after the VIX hit 76 on Thursday shows markets are still running the 2008 Financial Crisis playbook. If that pattern holds going forward, we’re set for a week or two of further significant losses and then a genuine low after back-to-back +5% down days.”
The S&P 500 plummeted as much as 11.4% Monday, triggering market-wide circuit breakers for the third time in a week. Meanwhile, the VIX jumped to 76 as investors attempt to assess the toll the coronavirus will take on the economy, even after dramatic moves from the Federal Reserve and other central banks around the world.
Going by the 2008 calendar, the market looks like it’s trading as if it’s late October or early November, according to Colas. On Oct. 28, 2008, the S&P 500 spiked more than 10%. The next five trading days did see some relative calm, but then “things got a lot worse,” he wrote. Over the next two weeks, the benchmark plummeted close to 15%, and then went into further free-fall over a two-day span. On Nov. 20, 2008, the VIX closed above 80, an all-time high, and the S&P 500 hit its lowest level of the year.
A similar reaction would take the index to 2,028, his calculations show -- a drop of 25% from Friday’s close.
“This history says any follow through from Friday’s bounce will be very limited and we can expect the S&P 500 to first grind lower and then wash out in a 1-2 day selling climax,” said Colas. “We can avoid a repeat of the worst parts of 2008’s market volatility if the U.S. government’s response to COVID-19 comes faster and more decisively now than then. If it does not, the downside for the S&P 500 is right around the 2,000 level.”
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