Warning: US Stock Market May Plunge 30% by the End of the Year
Influenced by the AI wave and expectations of a rate cut by the Federal Reserve (Fed), global stock markets are riding high on optimism. However, Gary Shilling, the legendary American market forecaster who correctly predicted the 2008 financial crisis, has recently sounded the alarm. Shilling believes that current US stock market valuations are excessively high, and he forecasts a potential 30% crash this year, urging investors to prepare for an economic downturn.
According to a report by Business Insider, although risky assets such as stocks and cryptocurrencies have been on the rise recently, Shilling views this as overly optimistic speculation. He anticipates an economic recession by the end of the year, with US stock markets potentially plummeting by as much as 30%.
“Speculation abounds about the economy, but overconfidence is usually ruthlessly corrected,” Shilling said. With the impact of a high-interest rate environment, companies are scaling back hiring, and the job market is weakening, with March unemployment rates nearing a 2-year high.
Shilling predicts that the substantial workforce expansion by companies due to the pandemic will lead to further layoffs as the economy falters, potentially pushing unemployment rates to a peak of 5% to 7%, signaling economic weakness.
The report highlights that meanwhile, the US quit rate in March declined to around 2%, indicating that workers are aware of the increased difficulty of successfully finding new jobs and are therefore less willing to resign easily.
Shilling has previously pointed out that the US stock market is overly concentrated in the “Magnificent 7” stocks, and the market is overly speculative, reflecting an unhealthy state. Looking back, economic recessions have typically occurred about 26 months after the Fed’s first interest rate hike. Given that the current rate hike cycle has already spanned 2 years, the economy may be heading towards a recessionary period.
The report also cites projections from the San Francisco Federal Reserve Bank, suggesting that the financial condition of most Americans has been poor in recent years and that they may have depleted their last bit of excess savings by March this year. Additionally, US bond yields have been steadily rising since July 2022, signaling an impending economic downturn.