For the first time in 12 years, economist and money money manager Gary Shilling is recommending that investors short U.S. stocks. More specifically, he’s suggesting a small short position in the S&P 500 while investors continue to hold modest long positions in defensive stocks like consumer staples and utilities, long positions in Treasuries and heavy positions in cash as well as short sales in commodities such as copper.
The last time Shilling recommended shorting the S&P 500 was 2007, just before the Great Recession.
Shilling’s reasons for his current call: rapidly slowing economic growth in the U.S. and abroad, sliding corporate profit growth and a recent retrenchment in consumer spending and confidence — most of these exacerbated by the continuing U.S.-China trade war.
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Shilling, who says the U.S. economy is already in recession, debunks the idea that low interest rates support high stock price-to-earnings ratios. He argues that the correlation between the S&P 500 P/E and yields on three-month Treasury bills, 10-year notes and 30-year Treasury bond are small and the reverse of what’s expected — less than 50% since 2000 when comparing the S&P earnings yield (the inverse of the S&P P/E) to Treasury yields.
Low yields instead “are probably foretelling economic weakness and possible deflation that will dramatically slash corporate earnings and P/Es,” writes Shilling, in his latest market outlook, noting that business investment is falling, and consumer spending, which supports about 70% of U.S. economic growth, is also slipping.
In addition, says Shilling, founder of A. Gary Shilling & Co., falling interest rates now are encouraging saving rather than spending by U.S. consumers. The U.S. savings rate is currently just over 8%, below the December 2018 high of 8.8% but well above the 5.9% to 7.2% range that persisted between February 2013 and November 2018.