Be prepared for U.S. stocks to breach their late March lows and drop 30%-40% as a “prolonged and deep recession” lasts into 2021, says economist and investment advisor Gary Shilling.
“We believe the prolonged recession will more than offset the monetary stimulus effects on stocks this time,” writes Shilling in his latest Insight report. “The bear market rally will reverse when investors no longer believe the government, especially the Fed, can support the economy in the face of the corona crisis.”
There are already signs that investors are becoming more cautious about U.S. stocks as COVID-19 spreads and some states, including Texas, California and Arizona, reversed some business reopenings. The S&P 500 ended a five-session winning streak on Tuesday after trading in a narrow range in June and at midday Wednesday was trading only slightly higher.
Coronavirus infections in the U.S. reached a new daily high on Tuesday, above 60,000, bringing the total number of infections to over 3 million with more than 131,000 deaths, according to Johns Hopkins University.
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Shilling says several catalysts could reverse the gains in stocks: a second wave of the virus, which would force renewed lockdowns — the current spread is due to an expanded first wave; evidence that consumer spending and production isn’t picking up due to fears about the virus; or an end to expanded unemployment benefits — they are set to end on July 31, if no additional congressional action is taken.