Gary Shilling: S&P 500 Likely to Slide 35%

While Shilling has recommended a “risk off” investing strategy for more than a year, he noted security markets have been pursuing a “risk on” state, “led by the nearly 20% rise in the S&P 500 index so far this year and investor conviction that a ‘soft landing’ with no recession is likely. We believe investor exuberance is irrational and will be reversed by recessionary drops in the economy as well as declines in corporate sales and profits.”

Shilling’s nine-point risk-off strategy “still seems appropriate to us. Persistent gains in employment and high inflation only imply further credit tightening by the Fed, which will break the economy if a recession is not already underway,” he said.

His recommendations include selling or shorting stocks, and Shilling noted that in June, “we reduced our short positions in stocks to essentially zero.”

Shilling’s risk-off strategy calls for investors to, in his words:

1. Long the U.S. dollar against other major currencies as the world’s premier safe-haven.
2. Long Treasury bonds. Bonds were beat up earlier, but have rallied recently as recessionary weakness in credit demand and their safe-haven status begins to overcome the effects of further Fed tightening.
3. Sell or short stocks in general as corporate earnings tank.
4. Short speculative stocks such as SPACs and crypto securities as speculations continue to come to grief.
5. Sell growth stocks as the Fed raises interest rates, making the present value of their future earnings, i.e., the current stock prices, lower.
6. Sell homebuilder stocks with supply jumping while demand falls as mortgage rates continue to rise.
7. Avoid COVID-related areas, especially China with a weakening economy after the pandemic lockdown and the housing sector collapse.
8. Avoid “defensive” stocks such as consumer staples, utilities and health care, which drop in bear markets, although not as much as cyclicals and other equities.
9. Hold extra cash to avoid market losses and prepare for eventual economic and financial market recoveries.

Pictured: Gary Shilling