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Portfolio > Economy & Markets

Shilling: Bear Market 'Puke Point' Is Quite a Way Off

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The stock market’s “puke point” — the bear market bottom — doesn’t seem imminent, economist Gary Shilling suggests in a recent report, writing that it’s premature to conclude investors have already priced in a recession.

The puke point marks the moment when stockholders who can be shaken out are indeed shaken out, he explains in his latest Insight report. ”They’ve regurgitated their last equity and swear never to buy another one.  … That’s when the bear market bottom is reached and a new bull market commences,” Shilling said.

“There are many signs that the puke point lies far ahead,” he added. “Some of those who earlier denied the possibility of a recession now say that if it occurs, it will be mild and it is already discounted in lower stock prices. They believe the Fed will cut interest rates next year, and we agree — but only after the central bank realizes it has precipitated a recession.”

While his firm released the commentary late last month, the economist referenced it in a tweet Monday, saying, “I don’t need the reported two straight quarters of negative real #GDP to tell me the US #economy is already in, or at least close to, a business downturn.”

In the report, he said: “Hopes that the bear market in stocks has largely anticipated a recession are no doubt premature. Stock devotees are far from reaching the puke point and capitulating.”

Shilling wrote that he foresees a 2022-2023 recession of average length and depth, but that risks to the economy are on the downside.

He cited liquidation of excess retail inventories, abetted by consumer retrenchment, and a likely drop in housing activity among the negatives.

Stocks rallied in June as concerns about the Fed’s rate-raising campaign and potential recession were countered by better-than-expected corporate earnings, some positive economic data and declining gasoline prices, Shilling explained.

If a recession is in the cards, it’s shaping up to be an unusual one, he wrote. High inflation persists, economic growth has weakened, the housing outlook appears bleak, consumers feel blue, and the yield curve has inverted — a sure recession signal historically, he noted.

Hiring remains strong and the unemployment rate remains low; but unemployment lags the overall economy, Shilling said. Meanwhile, consumers’ incomes and spending are falling in real terms. At the same time, he added, supply chains are improving and gasoline prices have retreated sharply from their near-$5-per-gallon average price.


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