Gary Shilling: 8 Market, Economic Predictions for Year-End and Beyond

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Gary Shilling: 8 Market, Economic Predictions for Year-End and Beyond

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Portfolio > Economy & Markets

Gary Shilling: 8 Market, Economic Predictions for Year-End and Beyond

By Dinah Wisenberg Brin

Slideshow October 20, 2023 at 03:13 PM Share & Print

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Economist and investment advisor A. Gary Shilling continues to expect a significant stock market fall and isn’t particularly optimistic about the U.S. economy either.

Shilling hosted a webcast Thursday in which he discussed his views on the stock and U.S. Treasury market and broader economic themes.

He cited a global economic slowdown, and said his firm remains long the U.S. dollar, which he called a “safe haven pure and simple. It’s where investors go in times of trouble.”

In his monthly investment newsletter earlier this month, Shilling reiterated his firm’s nine “risk off” strategies.

See the gallery for eight predictions from Shilling.

Dinah Wisenberg Brin

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Gary Shilling: 8 Market, Economic Predictions for Year-End and Beyond

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1. A major stock drop is likely.
There are many reasons to think stocks will be hit, according to Shilling, who said equities were “very expensive relative to bonds.” The economist, who has been predicting a significant stock slide from the market’s January 2022 peak, sees the S&P 500 declining 20% to 25% from its current level, probably in the next six months.

“It’s not a very pretty picture but it’s one that I think we need to be prepared for,” he said. “I don't see a lot of reason for optimism.”

Shilling said he doesn’t understand the strength in the S&P 500 starting last fall, lasting until recently — “somehow this conviction that there really isn’t much of a problem” — although stockholders don’t seem bothered, he said.

Similarly, he said he doesn’t understand what’s been happening with the high-priced big-tech growth stocks, i.e. the NYSE FANG+ index. He called it unrealistic, especially given what’s been happening with interest rates.

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2. Higher Treasury rates would be surprising.
Shilling said he would be surprised to see Treasury rates bounce much higher than they are now and doesn't see a reason why Treasurys should sell off much more than they have, given the outlook for recession and diminution of interest rates and inflation.

"I think we're in a very never-never land kind of situation where rational behavior is just not present," Shilling said.

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3. Earnings in 2024 are likely to disappoint.
Wall Street analysts have made very optimistic and aggressive estimates for S&P 500 earnings next year, which “are probably going to be disappointing,” Shilling said. If the economy experiences a recession, there is no way these estimates will be realized, he said.

He also noted “rolling bankruptcies” among many businesses and said the economy can expect more of the same.

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4. Don’t rule out recession.
While it may be easy to believe the economy will continue as is, avoiding a downturn, “I still think you’ve got to be concerned about some of these very reliable forerunners of recession,” Shilling said. He also called it “very optimistic” to expect the Federal Reserve to implement an extended pause in rate hikes, followed by rate cuts next year.

The federal funds rate declined before business peaked in the last four recessions, but “I don’t think that’s going to be the case this time,” Shilling said, noting the central bank’s focus on knocking inflation down to its 2% target. As a result, he expects a recession to extend well into 2024.

Energy will continue to be inflationary, barring a big settlement in the Middle East, Shilling noted.

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5. Regional banks will be under increasing pressure.
While employers seem to be adapting to a new world that encompasses remote working, the high office vacancy rate is putting pressure on regional banks, according to Shilling, who noted that bank deposits overall have declined sharply.

Many regional banks have had to resort to brokered deposits, he said. “This is hot money. These are not sticky deposits like businesses and business customers and individuals. This is … it’s very volatile and it can disappear in a hurry.”

Troubled banks will get bailed out by the Fed or the Federal Deposit Insurance Corp. if necessary, but the pressures hurt the economy, given tighter lending standards and slower lending, he explained.

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6. Consumer spending looks likely to stall.
Consumers are key to the economy, and the government money they received during the pandemic has fueled their spending in recent years.

“Stockholders are not particularly convinced that the strength in consumer spending is going to continue. That’s probably a valid assumption because a lot of the forces that have been driving it are really temporary,” Shilling said, noting that excess cash from the pandemic stimulus is declining rapidly and the savings rate has fallen as well.

“This drawdown in the savings rate has had a huge impact,” Shilling said. The economist also noted a runup in credit card debt, with interest rising to roughly 21% from 15%.

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7. The job market is slowing.
While compensation is on the upswing, Shilling cited different indicators that the labor market is softening.

“There’s no question that labor is flexing its muscles,” he said, adding that businesses have been more receptive to labor cost increases right after a time when they were scrounging for workers.

At the same time, the “quit rate” is declining, as are job openings, Shilling said. And productivity growth isn’t offsetting wage increases, he said.

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8. A key turning point for workers is on the horizon.
Shilling also noted that over-65 labor force participation hasn’t returned to pre-pandemic levels. And he said workers are looking at lifestyles in different ways after being able to work remotely during the COVID-19 crisis.

One of the big labor decisions in the next two years will be whether people are willing to take lower income and living standards and work less, or earn more and keep their earning power and go back to work, he predicted.

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