- Gary Schilling told BI that the coming recession could cause a “severe correction” in stock prices.
- The top forecaster pointed to warning signs of a recession, including a weakening job market.
- He warned that a full-fledged economic downturn could dampen investor expectations and cause stock prices to collapse.
Investors need to prepare for a recession that could send the stock market crashing this year, according to top forecaster Gary Schilling.
In an interview with Business Insider, the Wall Street veteran, who was among the investors in the so-called subprime mortgage bubble in the mid-2000s, predicts a recession by the end of the year as the job market continues to slump. he said. Schilling said this would be a decisive blow to a stock market rally fueled by investor overconfidence, and could cause stock prices to fall by as much as 30%.
Schilling pointed to the recent surge in risk assets such as stocks and cryptocurrencies. That in itself is a sign that the market is poised to fall, especially as a recession begins, he said.
“If you look at all the kinds of speculation that we’ve put out, it shows a lot of overconfidence, and it’s usually something that gets violently corrected and corrected,” he said.
The economy is already showing significant signs of decline due to the effects of high interest rates. The labor market is weakening, with the unemployment rate hovering near a two-year high in March.
Meanwhile, the job turnover rate fell to about 2% in March, indicating that workers have woken up to tough employment conditions and are less willing to quit their jobs than before.
As an example, the job market is “obviously depressed” as companies hold back on hiring, Schilling said.
Schilling believes that the labor shortages that have hit employers during the pandemic are causing companies to keep more workers on board than necessary. He predicted layoffs would intensify in the second half of the year and the unemployment rate would peak at 5% to 7% as the economy continues to slump.
“Employers wanted to hang on to their workforce and even increase their workforce because they thought things were going to be tight forever. Well, they weren’t always tight. Economic growth slowed. … Employers are simply making cuts,” Schilling said. he warned.
The job losses could ultimately hit Americans hard, especially as there are signs that many people are worse off economically than they were a few years ago. Economists at the San Francisco Fed estimate that consumers likely used up the last of their pandemic savings in March.
Meanwhile, several recession indicators have continued to sound alarm bells for the economy in recent months. The bond market’s most famous recession indicator, the 2-10 Treasury yield curve, has been signaling a recession since July 2022. The Conference Board’s Leading Business Index, another measure of economic strength, fell in April, although it has not yet been measured. areas of depression.
“As we start to see some weakness in these indicators, the actual economic downturn may be long-term and may fluctuate, but they are reasonably reliable. ‘I think it’s already in there,’ Schilling said.
Schilling is known for his often contrarian and bearish views on the market. He previously told Business Insider that he would actively disagree with other Wall Street strategists because the market has generally already discounted the consensus view.
“I think people are being overly optimistic and hopeful despite a lot of evidence to the contrary,” he warned.
