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Market prophet Gary Shilling warns stocks could crash by 30% – saying the odds are ‘very heavily in favor of a recession’

Gary Shilling.Bloomberg

  • Stocks could collapse by 30% and a recession could occur within months, Gary Shilling said.

  • The star forecaster said stocks are super pricey and noted several signs of economic tension.

  • Shilling predicted that the housing market would eventually recover and dismissed fears of de-dollarization.

A legendary market prophet has warned that overpriced stocks could collapse and a recession could hit within months.

“Stocks are very, very expensive now” relative to both corporate profits and competing assets such as government bonds, Gary Shilling recently told the Retirement Lifestyle Advocates radio show.

“If one of these days we wake up and find that a major company has gotten into trouble, and that leads to a massive 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 economics and investment advisory firm in 1978. The president of A. Gary Shilling & Co. is known for having made several prescient market forays over the past forty years.

The star forecaster noted that Shiller’s price-to-earnings ratio for the S&P 500 is about 45% higher than the long-term average, suggesting stocks are historically overvalued.

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He also warned that a handful of stocks make up a large portion of the stock market’s current value. Shilling described this kind of concentration as “always dangerous” because it gave the impression that investors “don’t like the rest of the stock market and therefore most of the economy.”

“This has been a hugely speculative market,” Shilling said, comparing the rise of the “Magnificent Seven” technology stocks to the “Nifty Fifty” bubble of the early 1970s that featured names like Winnebago and Polaroid.

Shilling warned that the S&P 500 could plunge 20% to 30%, although the decline “could be even greater.” He recently told Business Insider that the benchmark index could fall below 3,500 points – a 32% decline from the current level of around 5,100 points.

The veteran economist issued a similar warning in his ‘Insight’ newsletter for March. “Unbridled speculation seems destined for great doom,” he wrote, labeling bitcoin a “purely speculative vehicle.”

Cracks in the economy

The Shilling has shown a number of red flags that indicate a recession is looming. He pointed to the prolonged decline in the Leading Economic Index, pressure on housing starts, declining demand and consumer confidence, small businesses scaling back hiring plans, a weakening labor market and the Federal Reserve raising interest rates from almost zero at the beginning of 2022 to 2022. last summer more than 5%.

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Looking at the past seven recessions, Shilling highlighted that they occurred an average of 26 months after the Fed began raising rates. It’s been about two years since the first rate hike of this cycle, which suggests “the economy is entering a recession,” he said.

“The odds are very much in favor of a recession,” he added, noting that there has only been one soft landing since World War II.

Still, Shilling predicted it would take some time for the economy to capitulate. Companies have postponed laying off workers after facing labor shortages in recent years, and consumers have continued to spend by tapping into their pandemic savings and racking up record amounts of credit card debt, he said.

Houses and dollars

Shilling also shared his outlook for the frozen US housing market, the national debt and the dollar, predicting a “significant rebound” in housing activity over the next three or four years as mortgage rates fall.

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He also pointed to the risk of a future “debt bomb,” as rising federal borrowing causes the government to spend more and more of its budget paying the interest it owes.

On the dollar, Shilling said he was not concerned about “de-dollarization” or the end of the dollar’s dominance in foreign exchange markets.

“There is really no other option than the dollar,” he said. ‘It’s the cleanest sock in the wash. It is the tallest dwarf. It is the slowest falling stone. Whatever it is, it’s the best of them all.’

It’s worth pointing out that Shilling has long been sounding the alarm on stocks and the economy, but both have defied his dire predictions and performed surprisingly well. But in light of his long track record and decades of experience, many investors remain happy to listen to him.

Read the original article on Business Insider

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