Further 20% fall in U.S. stocks ‘certainly possible’: IMF director

A shift in investor sentiment could see a further 20% downside for U.S. stock markets, according to the International Monetary Fund’s director of monetary and capital markets.

IMF research found that rising interest rates and future earnings expectations were driving down company valuations in the current market downturn, Tobias Adrian told CNBC’s Geoff Cutmore at the 2022 Annual Meetings of the International Monetary Fund and the World Bank Group in Washington, D.C.

Sentiment and risk premia have held up “pretty well” so far, leading to an “orderly tightening,” he said Tuesday.

Asked about a recent CNBC interview with Jamie Dimon, in which the JPMorgan chief executive said the S&P 500 could easily fall by another 20%, Adrian said it was “certainly possible.”

The benchmark index has fallen by around 25% in the year-to-date.

The U.S. Federal Reserve raised its funds rate to 3%-3.25%, the highest it has been since early 2008, in September as it attempts to cool 8.3% year-on-year inflation. The latest U.S. inflation figures are due Thursday.

“My belief is that what Jamie Dimon is referring to is that there could be a shift in sentiment as well. And that would, of course, feed back into economic activity,” Adrian said.

“Now, as for the 20% number, it’s certainly possible. It’s not our baseline, but that is something that is possible.”

Adrian added the IMF had no specific figure for its baseline, but that it was one where financial conditions continue to be tightened, economic activity slows down and markets continue to be under pressure.

On Tuesday, the institution published its World Economic Outlook, in which it predicted global growth will slow to 2.7% next year, 0.2 percentage points lower than its July forecast.

It also said 2023 would feel like a recession for millions around the world, with about a third of the global economy experiencing a contraction.

Adrian told CNBC that despite recent volatility in areas such as U.K. government bonds, the IMF’s baseline continued to be that global credit markets remain “in an orderly manner” and would not tip into a full-blown crisis on the scale of a “Lehman moment.”

But, he added, there are a lot of risks to the downside.

“[Financial stability risks] are very elevated. They are only higher in times of acute crisis, such as the 2008 crisis, the 2020 Covid crisis or the euro crisis,” he said.

“So yes, we are in a very, very stressed moment, we do hope that we will avoid a systemic event. But the likelihood is certainly elevated at this point.”

Banks have a lot more capital and liquidity than during the 2008 crisis, when a lot of acute stress was caused by the banking system, he noted — however, an adverse scenario in emerging markets would see 30% of banking assets undercapitalized, and vulnerabilities in the non-bank financial system could spill into the banking system, he warned.