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April 19, 2024 at 02:43 PM
What You Need to Know
- Leading indicators point to a recession, he offered on his webcast.
- Consumers are under pressure, he noted, as excess savings have dwindled.
- Wages are up but high prices are giving consumers sticker shock, he said.
Stocks are “very expensive,” according to A. Gary Shilling, who said Thursday that the S&P 500 index would need to decline by half to reach its long-term average under a key measure.
The S&P 500’s cyclically adjusted price-to-earnings ratio, or Shiller P/E ratio, which divides current share price over the past 10 years’ inflation-adjusted earnings, has averaged 17 going back to roughly 1880, the economist and investment advisor said on his webcast.
“Now it is 34.4. Now, is this a brave new world? Is this something different? I’m always very skeptical of this idea of … ‘This time it’s different.’ And maybe it is, but I think you (have to) be very careful, because what it says to me is that stocks are very elevated, very expensive,” he said.
“As a matter of fact, it would take, if you just look at those numbers, it would take literally a 50% decline in the S&P to bring it back to that long-term average of 17. So I think you have to worry about the elevated level of stocks, and there’s a lot of evidence on that,” Shilling added.
Echoing his earlier comments, the economist also voiced concern over “excessive confidence and concentration” in the “Magnificent 7” tech stocks, which have an average price-to-earnings ratio of nearly 35 compared with roughly 21 for the rest of the S&P 500, according to a chart Shilling presented.
“I’ve talked about this many times, but you’ve had this tremendous concentration on speculative areas, and that always bothers me because … it’s not just the concentration on this limited list of stocks,” but it says “investors are not interested in everything else.”
Touching on his economic outlook, Shilling said leading economic indicators “are distinctly forecasting recession.” Among numerous other points, he noted that a negative yield curve for two-year versus 10-year Treasurys consistently portends recession.
“There are no exceptions to that,” Shilling said.
The situation with the federal funds rate is similar, with one exception, he said.
“The only time that you had an increase in the funds rate and then a decline with no recession to follow was in the mid-1990s. And you don’t know it’s a soft landing” until the Fed has cut rates, Shilling said.
