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

Economist and investment advisor A. Gary Shilling, sticking to his view that  “investor exuberance is irrational,” expects the S&P 500 to fall 35% from here on recessionary pressures on corporate earnings.

“There’s an ongoing tug-of-war between optimistic investors who foresee a soft landing for the U.S. economy, and the Fed, which is determined to reduce inflation to 2%, even at the likely cost of a recession. We bet on the central bank and the reliable recession harbingers such as the inverted yield curve and the declining leading indicators index,” he wrote in his monthly “Insights” newsletter, released Thursday.

“Rising interest rates are rewarding Treasury bond buyers but making already high-priced equities even more expensive, relatively. The Fed promoted the 2022 drop in stock prices, and recessionary weakness in corporate sales and earnings will probably drive the S&P 500 down about 35% from here to meet our 40% total decline forecast,” Shilling said.

The adviser has predicted a 40% drop from the stock market’s January 2022 peak since last year.

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.