Hold on to your butts: the market could be in for a drop reminiscent of the Great Depression.
That’s according to financial analyst Gary Shilling, who in an interview this week said that the market could fall between 30% and 40% over the next year as investors begin to realize the economic recovery from the coronavirus pandemic could take longer than anticipated.
“I think we’ve got a second leg down and that’s very much reminiscent of what happened in the 1930s where people appreciate the depth of this recession and the disruption and how long it’s going to take to recover,” Shilling told CNBC in the interview.
Since the market bottom on March 23, stocks have rebounded sharply on the hopes for a V-shaped recovery and positive coronavirus treatments and vaccines headlines. However, while early economic data bolstered the case for a V-shaped recovery from the economic shutdown due to COVID-19, cases have continued to climb—surging past 3 million confirmed cases in the U.S. this week—and data is starting to point to a slowdown in the recover.
Shilling says the S&P 500’s nearly 41% rise since the March bottom looks much like the rebound the index saw in 1929 when stocks rallied after their initial crash.
If history repeats itself, Shilling says the S&P 500 could see a similar decline to what it saw in the early 1930s as the severity of the Great Depression grew clearer.
“Stocks are [behaving] very much like that rebound in 1929 where there is absolute conviction that the virus will be under control and that massive monetary and fiscal stimuli will reinvigorate the economy,” Shilling said.
So where can investors park there cash in such an environment?
“I think we’re going to see downward pressure on prices and that works to the advantage of Treasury bonds, which have been my favorite since 1981,” the veteran investor said.
Shilling has been skeptical about a V-shaped recovery and quick rebound in the second half of the year for months, and said in a Bloomberg op-ed in May that “the total decline in stock wealth I foresee will knock 2.8% off consumer spending.”
“This pandemic is likely to be the most disruptive financial and social event since World War II with equally long-lasting consequences,” Shilling said. “Many will no doubt restrain spending in future years to rebuild savings, especially since the crisis caught them at a time of high debts and short financial reserves.”
“A widespread economic revival is unlikely until a vaccine and widespread testing are available,” Shilling concluded.