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'You Haven't Seen Anything Yet' as Stocks Sink, Economies Falter

Stocks in this article: GS DB

(Adds economic reports from today showing few signs of improvement.)

BOSTON ( TheStreet) -- October has a history of being an especially cruel month for investors. And if the stock market's disastrous performance and volatility in the third quarter was a prelude, it may well be again.

Economists are divided on whether the U.S. economy is about to fall into a recession and drag the equity market and Americans' 401(k)'s down with it. That's a scary prospect because the benchmark S&P 500 Index is nearing a bear market, having declined almost 20% since late April. Other asset classes such as commodities, oil and real estate also have fallen.

Economists' latest prognostications will make your head spin, but they agree on one thing: A resolution of the Eurozone's sovereign debt crisis this month would go a long way toward getting the world's economy and stock markets back on track.

On the optimistic side, Deutsche Bank (DB) said Tuesday that "we believe the U.S. will avoid another downturn because the U.S. corporate sector is extremely healthy, (with) profits per private worker at a record-high reading.

"In the past, the U.S. economy has never entered a downturn when profits were so high and companies were so lean," Deutsche Bank said. "In fact, we do not see many of the imbalances, such as a bloated corporate sector, that typically precede a recession."

Goldman Sachs (GS) analysts came out with a similar, but tempered, view on Friday, saying "our base-case forecast continues to be that the U.S. economy will avoid a recession, though the risks are high and rising."

The firm's economic analyst Zach Pandl wrote that "an average-size economic shock would lead to a relatively shallow recession today. We see the main downside scenario as a shallow recession followed by a slow recovery."

Ironically, the reason that it would be "shallow" is that things are so bad now, they don't have far to fall. "Low activity in cyclical sectors of the economy is likely a major positive: residential investment, vehicle sales and spending on business structures are extremely low, and therefore less vulnerable to steep declines," Pandl wrote.

But on Tuesday, Goldman's London office cut its forecast for global growth in 2012, to 3.5% from 4.2%, and said it now expects the Eurozone to sink into a "mild" recession in the fourth quarter.

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