Gary Shilling Warns 'Violent' Stock Drop Could Be Ahead

What You Need to Know

The Fed will eventually drive investors to the point at which they can’t stomach another stock, Shilling says, repeating a theme.
Investors have followed this pattern in the 12 post-World War II bear markets associated with recessions, he said.

Economist and investment advisor A. Gary Shilling maintains his view that the stock market is headed for a downturn, predicting the Federal Reserve will ultimately defeat investors who doubt the central bank will keep tightening credit until it subdues inflation and global economies retreat.

The Fed and other major major Western central banks are determined to push annual inflation to 2%, he noted in his July Insight newsletter, issued Friday.

“We continue to believe the Fed will win the tug of war with equity investors, with victory signaled by stockholders reaching the Puke Point as they regurgitate their last equities and swear to never buy another. That leaves the stock market depleted of potential sellers and facing nothing but potential buyers,” Shilling said.

“This pattern has been the case in the 12 bear markets associated with recessions in the post-World War II years,” he continued. ”The lack of a meaningful stock decline recently may forerun a violent ‘catch-up’ drop in the future.”

In previous newsletters, Shilling predicted the S&P 500 would fall 40% from its Jan. 3, 2022, peak. After the market’s recent rally, the index closed Monday down about 7.1% from the close on that date. (In his May newsletter, he noted stocks were 17% off the peak and suggested they had another 28% to go to reach his firm’s target.)