The Financial Crisis in 2020: Less Painful but Filled with Liquidity Worries

Image: DNY59/iStock

JPMorgan predicts that the next financial crisis will hit in 2020, according to a recent Bloomberg report citing an analysis by the Wall Street bank.

The prediction is based on a model aimed at gauging the timing and severity of the next financial crisis, the report says.

The bank was quoted as saying that the next crisis will not be as painful as past ones, with stocks declining about 20%, compared to the 54% drop of the S&P 500 from its peak during the last global financial crisis.

Energy prices are predicted to drop 35% and base metals 29%, while US corporate bond yield premiums will at about 1.15 percentage points.

In addition, the emerging market stocks will see a 48% plunge and emerging currencies 14.4% decline.

The bank also warned of a possible liquidity crisis.

“The shift from active to passive asset management, and specifically the decline of active value investors, reduces the ability of the market to prevent and recover from large drawdowns,” Joyce Chang and Jan Loeys wrote in the research note earlier this week.

Actively managed accounts represented one-third of equity assets under management, with active trading in single stocks accounting for only 10% of trading volume, JPMorgan was quoted as saying, adding that this change has “eliminated a large pool of assets that would be standing ready to buy cheap public securities and backstop a market disruption.”