“Without question, the new vaccines have dramatically changed the economic outlook, but the euphoria seems overdone,” Gary Shilling writes. Click through this gallery for more on why the economist and advisor is pessimistic about equities — and the U.S. economy.

(Photo via Gary Shilling)
1. Coronavirus vaccines will not be distributed until well into 2021 in developed countries and even later in developing nations. In the meantime, government restrictions and consumers’ fear of infection will continue to weigh on the global economy.

(Photo: Shutterstock)
2. Rapid deployment of effective vaccines could boost global growth by 5.5% in 2022 if the U.S. and Europe adopt fresh fiscal stimulus packages, but growth will increase only 2.2% if vaccine deployment is slower. U.S. and eurozone policymakers don’t expect their economies will recover to pre-COVID-19 levels until 2022 even with widespread distribution of vaccines.

(Photo: Shutterstock)
3. U.S. consumer spending is slowing, rising only 0.5% between September and October while disposable personal income fell 0.8%.

(Photo: Shutterstock)
4. U.S. job market growth is slowing and permanent job losses are rising. Shilling references the payroll growth slowing to 638,000 in October along with permanent jobs losses of 3.7 million. After his report was published, the Labor Department reported that payrolls rose only 245,000 in November and permanent job losses remained at 3.7 million.

(Photo: Shutterstock)

Advertisement

5. Enhanced unemployment benefits for workers on payrolls and for freelancers expire at the end of the year along with moratoriums on evictions and utility disconnections due to nonpayment. If Congress fails to renew these programs, consumer spending and the economy more generally will slow further.

(Photo: Shutterstock)
6. The new stay-at-home economy will continue to disrupt businesses and many will not survive the impact of the pandemic, including many restaurants, movie theaters and retail stores. Retail bankruptcy filings as of mid-August reached 29, topping the total of 22 for all of 2019 and include such well known brands as Brooks Brothers, J. Crew, Lord & Taylor and J.C. Penney. Many airline bookings, especially business bookings, will be gone permanently as businesses replace in-person meetings with online ones.

(Photo: Shutterstock)
7. The Congressional Budget Office forecasts 1.8% annual U.S. GDP growth from 2020 to 2030, well below the 2.5% average from 1990 to 2019. Global growth is also slowing. The International Monetary Fund projects global GDP adjusted for inflation will drop 4.4% this year and rise 5.2% in 2021, which, combined, leave global growth flat with 2019. China is the only major economy that is expected to grow this year, but only at 1.9% while the U.S. economy shrinks 4.3% and the eurozone 8.3%.

(Photo: Shutterstock)
8. U.S. equities are expensive. The cyclically adjusted P/E (CAPE) of the S&P 500 is over 31 and will need to fall below 17 in future years if the long-term average is still valid.

(Photo: Shutterstock)
9. Investors who buy stocks because there is no alternative — what Shilling calls TINA — ignore the possibility that if the recession persists well in 2021 and deflation unfolds, the 30-year U.S. Treasury yield could fall another 1%, providing a 20% or greater real return while the S&P 500 could fall 30% to 40% “as earnings multiples return to earth.

(Photo: Shutterstock)

Advertisement

The rally that has sent the stock market to record highs is too much too soon and likely too enthusiastic, according to economist and investment advisor Gary Shilling, founder of A. Gary Shilling & Co.

“Without question, the new vaccines have dramatically changed the economic outlook, but the euphoria seems overdone. Economic weakness could well persist for another year—disappointing to equity bulls but beneficial to Treasury bondholders,” writes Shilling in his latest Insight report. 

“Stocks are priced for perfection,” oblivious to such warning signs such as the volatility in the VIX, which has closed above 20 for almost 200 consecutive trading sessions. In eight past periods when the VIX topped 20 for at least 100 days, the S&P 500 has fallen, writes Shilling, citing Dow Jones Market Data .

Shilling expects the recession will “renew” in the balance of this year and persist into 2021. And when that shift becomes more apparent to investors, they will move from a “risk on” strategy to a “risk off” on, according to Shilling.

Check out the slideshow above for more on why Shilling is pessimistic about the outlook for the U.S. economy and for equities.

— Related on ThinkAdvisor: