Gary Shilling.
Bloomberg
According to Gary Shilling, stock prices could fall by 30 percent and a recession could occur within months.
The star forecaster said stocks were overpriced and pointed to several signs of economic strain.
Shilling predicted that the housing market would recover in time and dismissed fears of de-dollarization.
This is a machine translation of an article from our US colleagues at Business Insider. It was automatically translated and checked by a real editor.
A legendary stock market prophet has warned that overpriced stock prices could collapse and a recession could occur within months. “Stocks are very, very expensive now,” Gary Shilling recently said on the Retirement Lifestyle Advocates radio show, compared both to corporate earnings and to competing assets like government bonds. “If we wake up one day and find that a big company is in trouble and that triggers a big sell-off in stocks, I wouldn’t be surprised at all,” he added. Shilling was Merrill Lynch’s first chief economist and founded his own economic consulting and investment advisory firm in 1978. The president of A. Gary Shilling & Co. is known for making several forward-looking market assessments over the past four decades.
The star forecaster pointed out that the Shiller price-to-earnings ratio for the S&P 500 is about 45 percent above the long-term average, suggesting the stocks are historically overvalued. He also noted that a handful of stocks account for a large portion of the stock market’s current value. Shilling called this kind of concentration “always dangerous” because it suggests investors “don’t like the rest of the stock market and therefore most of the economy.” “It’s a highly speculative market,” Shilling said, comparing the rise of “Magnificent Seven” technology stocks to the “Nifty Fifty” bubble of the early 1970s, which focused on names like Winnebago and Polaroid.
Shilling warned that the S&P 500 could fall 20 percent to 30 percent, with the drop “could be even greater.” He recently told Business Insider that the benchmark index could fall below 3,500 points – a drop of 32 percent from its current level of around 5,100 points. The veteran economist issued a similar warning in his March Insight newsletter. “Rampant speculation seems destined for great doom,” he wrote, calling Bitcoin a “purely speculative vehicle.”
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Cracks in the economy
Shilling listed a number of red flags that indicate an impending recession. He cited the ongoing decline in the Leading Economic Index, pressure on housing construction, dwindling consumer demand and confidence, small businesses scaling back hiring plans, a weakening labor market and the Federal Reserve raising interest rates from near zero At the beginning of 2022, it rose to more than five percent last summer.
Looking at the last seven recessions, Shilling emphasized that, on average, they began 26 months after the Fed began raising interest rates. It’s been about two years since the first rate hike this cycle, which suggests “the economy will experience a downturn,” he said. “The odds are very good for a recession,” he added, noting that there has only been one soft landing since World War II.
Still, Shilling predicted it would take time for the economy to capitulate. Companies have held off on layoffs after facing labor shortages in recent years, and consumers have kept up spending by tapping into their pandemic savings and racking up record amounts of credit card debt, he said.
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Homes and dollars
Shilling also shared his outlook for the frozen U.S. housing market, the national debt and the dollar, predicting a “significant pick-up” in housing activity over the next three or four years as mortgage rates fall. He also highlighted the risk of a future “debt bomb” as the government’s increasing borrowing causes it to spend more and more of its budget on paying interest.
Regarding the dollar, Shilling said he is not worried about “de-dollarization” or the end of the dollar’s dominance in currency markets. “There’s really no other option than the dollar,” he said, “It’s the cleanest sock in the laundry. He is the largest dwarf. It is the slowest falling stone. Whatever it is, it’s the best of them all.” It’s worth noting that Shilling has long warned about stocks and the economy, but both have defied his dire predictions and performed amazingly well. But given his long-term track record and decades of experience, many investors are happy to listen to him.
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