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- Doug Ramsey, chief investment officer at Leuthold Group, thinks the coronavirus could be the variable that finally pushes the US into recession.
- He backs up his thesis with the notion of economic narratives, an increasing amount of recessionary precursors stacking up, and valuations on the higher side of the historical average.
- Ramsey thinks that if the sentiment-driven economic narrative starts to wane as coronavirus fears flare, that could force the US into recession.
- "That's why I'm so concerned about a downturn here," he said.
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"What if this is the thing that brings it down?"
That's what Doug Ramsey, chief investment officer at Leuthold Group, asked a group of Business Insider reporters as the S&P 500 plunged more than 4%, adding to a grizzly selloff.
The thing that Ramsey is referring to is none other than the coronavirus - and he thinks it could be the straw that breaks the market's proverbial back.
"There's really never been anything quite like this in my memory, or in anyone's market memory," he said. "It'll just be interesting how the narrative unfolds."
The importance of the narrative that Ramsey describes above cannot be stressed enough. It's an idea that Robert Shiller - the Nobel Prize-winning economist who predicted the dot-com and housing bubbles - brought to light in his new book "Narrative Economics." In the text, Shiller explains how viral stories (no pun intended) drive markets, and affect economies and behavior.
Due to the coronavirus' wicked effects, Ramsey thinks we may be in the midst of a narrative shift. One that could force the US into a recession.
He paraphrased a quote from legendary investor and billionaire George Soros to bolster his thesis.
"Financial markets have a very safe way of predicting recessions: they cause them," Ramsey recalled hearing Soros say a few years back.
In Ramsey's mind, this is what makes the stock market unique. He says it plays a role in the eventual economic outcome via confidence and the wealth effect. It's not an individual forecaster, it's the collective reasoning of millions - and when the story underpinning the previous narrative shifts, so do markets.
"That's the danger of a serious stock market decline here," he said. "It's the combination of sniffing out a downturn and then actually playing a role in causing the downturn."
With leading indicators flailing, valuations on the higher end of the historical spectrum, and sentiment now in disarray due to the coronavirus, Ramsey isn't coy in sharing his uneasiness about the confluence of variables.
"That's why I'm so concerned about a downturn here," he said. "You just had so many recession precursors."