Gary Shilling: 5 Signs We're Headed for Recession

Stocks are vulnerable as the U.S. economy appears headed toward recession, which would affect corporate profits, economist and investment advisor A. Gary Shilling suggested last week.

“We are in a precarious position,” he said in a webcast.

Stocks and U.S. Treasurys have rallied lately, apparently on investor relief that the Federal Reserve is ending its aggressive tightening cycle, according to Shilling. The economist, however, believes investors are “jumping the gun” in expecting the Fed to start cutting rates soon.

Meanwhile, the full impact of rate hikes has yet to be felt.

While inflation is declining, it hasn’t yet hit the Fed’s 2% target, he noted.

While there’s no rhyme or reason to the Fed’s 2% inflation target, the central bank will have to stick to it for credibility reasons, the economist said.

Yearly inflation as measured by the Consumer Price Index was down to 3.1% as of November, he noted. Inflation is unwinding, down from about 9% in June 2022, as its reasons for quickly rising — high oil prices, pandemic-related supply disruptions, worries about the war in Ukraine — have reversed, according to Shilling.

It will take months or years for the Fed’s tightening moves — it raised its benchmark interest rate from 0% to 5 1/4% over 18 months — to work their way through the economy, he predicted.

Shilling does think interest rates have peaked amid a weakening economy and that the Fed is heading toward easing them.

The economy is showing signs of weakness and stock valuations are high, according to Shilling, who suggested the economy is experiencing “the calm before the storm.”

Check out the gallery to see what has Shilling worried.