US stocks could fall in severe recession: Nouriel Roubini

US stocks will have much further to fall if the economy careens into a severe recession next year, according to a prominent economist known as “Dr. Doom.”

Nouriel Roubini, a New York University professor emeritus known for his pessimistic economic predictions, warned the S&P 500 could plunge another 25% in the event of a severe downturn in 2023.

The broad-based index has already fallen about 17% since January during a period of sustained market volatility.

“Even if you have a short and shallow recession, typically, from peak to trough, the S&P 500 falls by 30%. During the [global financial crisis], it fell by 50%,” Roubini told Bloomberg on Wednesday.

“If we have something more severe than a short and shallow recession but not as severe as the global financial crisis… you have another 25% downside potentially in the markets,” Roubini told Bloomberg.

Roubini has warned for months that the US economy will suffer a “hard landing” as the Federal Reserve sharply hikes interest rates to tackle inflation. In July, “Dr. Doom” called predictions of a shallow recession “delusional” due to rampant “stagflation” – defined as a combination of stagnant economic growth and high inflation.

At present, the market expects the Fed to hike its benchmark interest rate to about 5% in 2023 – up from its current range of 3.75% to 4%. But Roubini sees the rate rising “closer to 6%” to tamp down inflation.

The Fed is slated to hold its final policy meeting of the year next week, with an announcement on its next interest rate hike expected on Wednesday. The market expects the central bank to hike by a half percentage-point, according to CME Group data.

Roubini told Bloomberg the continued hikes will hammer credit markets and cause major stress for “zombie” businesses with poor balance sheets. He argued that many distressed companies were “effectively insolvent” prior to the Fed’s policy tightening.

“During the COVID crisis, those institutions, those corporations not only didn’t go bust, but they were bailed out when they went to zero rates. We even bought high-yield bonds and therefore everything was bailed out and they borrowed even more,” Roubini said.

Roubini isn’t the only economic doomsayer warning of rough economic conditions in the year ahead.

Last month, Michael Burry, the hedge fund boss made famous in the 2015 film “The Big Short,” said a “multi-year recession” was essentially unavoidable because the Fed lacks good options to address the situation.

Roubini replied to Burry to say he had also predicted “a long and severe recession.”