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Portfolio > Economy & Markets

Gary Shilling: Bear Market Won’t Leave Till Investors Heave

By Dinah Wisenberg Brin

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What You Need to Know

  • The long runup may have created an atmosphere where investors think they can't lose with stocks, Shilling said.
  • The advisor recommends selling stocks and holding a big cash position.
  • Buying and holding is good advice but most people don't take it, he said.

After watching strong equities performance for years, too many investors expect stocks to rebound soon, economist and investment advisor A. Gary Shilling said Monday, explaining that the bear market’s “puke point” remains a way off.

For the bear market to reach its bottom, people must be so fed up that “they want to regurgitate their last stock and swear they’ll never buy another one,” Shilling told ThinkAdvisor. “Far too many people think there’s a near-term recovery. You need to get that recapitulation” that’s typical of market bottoms. “I don’t see any signs of capitulation,” he added.

“You’ve got to run out of sellers,” but “far too many people cling to the idea that this is a short-term phenomenon,” Shilling said. “You have to have a change in attitude and I just don’t think there’s any evidence of that yet.”

As he wrote in his recent October outlook, Shilling expects the S&P 500 index to drop roughly another 20% this year to reach his forecast of a 40% decline from January’s peak.

“We’ve had a long run in stocks to the upside,” from right after 2008 financial crisis, he noted in a phone interview. While the COVID-19 pandemic caused a brief setback in the market, “you had tremendous fueling of investor funds by fiscal stimuli that many people got in the checks after the pandemic and also the Fed pumping money into the economy,” he said, noting the Fed is now withdrawing money.

That performance appeared to create an atmosphere where people think they can’t lose with stocks, Shilling said.

In his recent published commentary, Shilling recommended that investors sell or short stocks in general as corporate earnings tank and instead hold large cash positions.

“The history is that when you get major bear markets that there are no places to hide,” he told ThinkAdvisor. The so-called defensive stocks like utilities, health care and consumer staples “generally hold up better than the aggregate market but they all go down in major bear markets,” he said.

What about the traditional guidance, popular with financial advisors, that investors should buy and hold for the long term and avoid panicking when stocks slide?

“The reality is that if people really followed that it’s not a bad strategy, but they don’t. They panic at the bottom and then they don’t get back into stocks until the next bull market is well advanced,” Shilling said. “Equity mutual funds do better than the investors in those funds. Why? Because the investors sell at the bottom and don’t buy until the recovery is well advanced.”

If people don’t want to lose money, they shouldn’t be in stocks now, Shilling said, adding that history shows most investors aren’t in the market for the long term. “If people really stuck to it, it would be fine,” he said.

Shilling suggested investors “take some money off the table,” take some losses and “have a heavy cash position.” His firm has taken a “risk-off” stance — long the U.S. dollar and short stocks — “and our portfolios are doing very well as a result,” he said. “Selling short is not anti-patriotic, I assure you, but a lot of people think it is.”

Shilling recommended that investors imagine their portfolios going down another 10% or 20%. “Try to envision what you would feel like if you had that kind of losses,” he said. 

Money market funds and Treasury bills don’t make much money but don’t lose any either in nominal terms, he said, noting that these cash parking spots do lose in real terms because of high inflation.

I bonds, a U.S. savings bond designed to protect investors from inflation, are a great idea in theory, Shilling said, but he said his efforts, through an in-house accountant, to purchase I bonds for himself and his children have repeatedly been stymied by difficulties on the government’s website.

(CNBC, noting investors’ frustrations with the nearly 20-year-old TreasuryDirect site, which one financial planner compared to the DMV, recently reported that the platform is being overhauled to improve user experience.)

Dinah Wisenberg Brin

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