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Gary Shilling, A. Gary Shilling & Co.

Portfolio > Economy & Markets

Gary Shilling Predicts 21% Further Stock Market Slide

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What You Need to Know

  • To hit his 40% peak-to-decline forecast, the S&P 500 needs to drop more than 20% more, Shilling said.
  • Equities are expensive despite the market's drop this year, he said.
  • Even defensive stocks should be avoided, Shilling suggested.

The S&P 500 will probably drop roughly 21% further, driven mostly by corporate earnings declines, economist and investment advisor Gary Shilling predicted recently, noting that stocks remain expensive even in this year’s rocky market.

Early this year, Shilling predicted a recession would start later in 2022 and extend into 2023, and forecast a 40% peak-to-decline in the stock market, in line with previous major recessions.

“To date, the S&P 500 is down 24%, largely due to the negative effect of rising interest rates, but equities are still expensive,” he wrote in his October Insight report, released Monday. (As of mid-morning today, the S&P 500 was down 21.7% year-to-date after a rally this week.)

“To reach our target of a 40% total decline in stock prices, another 21% drop from here is likely,” Shilling added.

“But we’ll be convinced that the bear market is over when speculators and many equity investors give up,” he wrote. “So far, individual investors with a ‘buy the dip’ mentality have been buying stocks after declines as the pros bail out. Still, the hoped-for rebounds haven’t materialized.”

Shilling reiterated his suggestion that investors short or sell stocks in general “as corporate earnings tank.”

Even “quality stocks,” which Shilling called a vaguely defined term, have been knocked around in the bear market.

“Several have dropped over 26% this year, more than the 24% plunge in the S&P 500,” he wrote. “But these stocks are still more expensive than the overall market. There’s been no place for bullish equity investors to hide. On the way up, performance is relative, but on the way down, it’s absolute.”

Shilling attributed the fall in stock prices so far to the effects of rising interest rates on price-to-earnings ratios, which he said fell 34% while the S&P 500 index slid 24%.

Recessionary declines in corporate earnings will drive the bear market’s second phase, Shilling predicted, noting that Wall Street analysts continue to expect earnings per share to rise.

Analysts also expect a 30% rise in the S&P 500 index from the 3,647 the index hit midweek last week, to 4,729, Shilling added.

“Well, as we’ve said many, many times, stock market forecasters are paid to be bullish and those that aren’t, regardless of reality, suffer considerable job insecurity,” he said.

Investors, government officials and the media “have yet to look beneath the veil of inflation to see the weakness in real wages and consumer spending,” Shilling wrote, noting also that rising interest rates and unaffordable prices are knocking down the housing sector.

As the recession unfolds, demand weakness will hit inflation numbers and reveal this weakness, he said, adding that unemployment lags the economy “and sooner or later, job cuts will jump.”

The global recession may have started already and will last likely last well into next year, knocking down inflation, he predicted.

Shilling said he’s sticking with his recent investment strategy suggestions, including:

  • “Avoid ‘defensive’ stocks such as consumer staples, utilities and health care, which still tend to drop in bear markets along with cyclical and other equities.”
  • Sell or short stocks in general “as corporate earnings tank.”
  • Short speculative stocks such as special-purpose acquisition companies and crypto securities “as speculation continues to come to grief.”
  • Sell growth stocks as the Federal Reserve raises interest rates.
  • “Sell homebuilder stocks with supply jumping while demand falls as mortgage rates continue to rise.”
  • Avoid China and other “COVID-related” regions.
  • Hold large cash positions to avoid market losses and prepare for eventual economic and market recoveries.
  • Long Treasury bonds modestly.
  • Long the U.S. dollar against other currencies.


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