Gary Shilling Sticks to Risk-Off Mode

What You Need to Know

The economist and advisor is still waiting for investors to swear off stocks.
Consumer spending and jobs strength boost the odds of more rate hikes, he wrote in his latest outlook.
Energy prices, student loan repayments and strikes in the auto industry put drag on the economy, he wrote.

Stocks remain costly given softening economic conditions, according to economist and investment advisor A. Gary Shilling, who also expects the Federal Reserve to continue raising interest rates and for a recession to extend well into next year.

“Stocks are still expensive in relation to weakening profits and the unfolding recession,” he said in his monthly newsletter, Insight, released Wednesday. Repeating his gastrointestinal metaphor for market sentiment, Shilling wrote, “Investors have not yet reached the ‘puke point’ where they regurgitate their last equity and swear off stocks.”

Shilling maintains his “risk off” investing position and noted that the market appears to have moved to the same stance.

“Many investors have hoped for an economic and stock market soft landing with no recession or major bear market. Nevertheless, the jobs market is cooling even as labor becomes increasingly militant,” Shilling wrote.

“Reliable recession harbingers are numerous. High energy prices, resumed student loan repayments, and ongoing auto strikes also drag the economy. Small and riskier firms are troubled by high interest costs. The Fed may raise interest rates further and plans to cut them slowly next year,” he said.

Inflation-adjusted consumer spending is falling, and corporate profits are distressed by higher labor costs that companies can’t completely pass to customers, according to Shilling, who said smaller and more leveraged firms are under pressure.