Legendary investor Shilling warns: High probability of economic recession, US stocks may plummet by 30%.

Zhitong App has learned that a Wall Street legendary investor recently warned that stocks with overvalued valuations may experience a sharp decline, and an economic recession could arrive within a few months.

Gary Shilling stated in a program that compared to competitive assets such as corporate profits and U.S. Treasury bonds, "stocks are now very, very expensive."

"If one day we wake up and find a major company in trouble, triggering a big drop in the stock market, I wouldn't be surprised at all," he added.

It is understood that Shilling was the first chief economist at Merrill Lynch and founded his own economic and investment consulting firm in 1978. As the president of A. Gary Shilling & Co., he is renowned for making insightful market predictions over the past 40 years.

This prominent forecaster pointed out that the Schiller P/E ratio of the S&P 500 (the cyclically adjusted price-to-earnings ratio) is about 45% higher than the long-term average, indicating that stocks have been historically overvalued.

He also cautioned that a few stocks make up a significant portion of the current market value, describing this concentration as "always dangerous" because it suggests that investors "really don't like other parts of the stock market, and therefore don't like most of the economy."

Shilling remarked, "This is a market driven by crazy speculation," and compared the rise of the "Big Seven" tech stocks to the "Nifty Fifty" bubble of the early 1970s.

Shilling warned that the S&P 500 could drop by 20% to 30%, with a decline "possibly even greater." In a recent interview, he suggested that the benchmark index could plummet to below 3500 points, a 32% drop from the current level of around 5100 points.

This is not the first time this seasoned economist has issued such warnings. In his March Insight newsletter, he wrote, "Rampant speculation seems destined to lead to a major crash." He specifically highlighted Bitcoin as a "pure speculative tool."

Economic Cracks Emerge

Shilling raised a series of danger signals hinting at an impending economic recession. These include a continuous decline in the U.S. Leading Economic Index, pressure on housing starts, weakening consumer demand and confidence, small businesses reducing hiring plans, a soft labor market, and the Federal Reserve raising rates from nearly zero at the beginning of 2022 to over 5% last summer.

Shilling emphasized that the past seven recessions have occurred an average of 26 months after the Fed began raising rates. He stated that it has been about two years since the first rate hike of this cycle, indicating that the economy is heading into a downturn.

"The likelihood of an economic recession is significant," he added, noting that there has only been one soft landing in the economy since World War II.Despite this, Shilling predicts that the economy will take some time to weaken. He mentioned that in recent years, faced with labor shortages, businesses have postponed their plans to lay off workers, while consumers have maintained their spending by tapping into their pandemic savings and record credit card debt.

Real Estate and the US Dollar

Shilling also shared his outlook on the stagnant US real estate market, government bonds, and the US dollar. He forecasts a "significant recovery" in real estate activity in the next three to four years as mortgage rates decline.

He also pointed out the risk of a future "debt bomb" as the escalating federal debt leads to the government spending more and more of its budget to pay the interest it owes.

As for the US dollar, Shilling stated that he is not concerned about "de-dollarization" or the end of the US dollar's dominance in the foreign exchange market.

"Besides the dollar, there really isn't any other choice," he said. "Regardless, it is the best option."

It is worth noting that Shilling has long been warning about the stock market and the economy, but both have defied his predictions and performed surprisingly well. However, given his long track record and decades of experience, many investors are still willing to listen to his opinions.