- The stock market faces a reckoning when investors come to terms with the coronavirus’ long-term economic damage, legendary economist Gary Shilling said.
- Shilling — who correctly called the housing-market crash of 2008 — told CNBC that equities could tank up to 40% once such realizations are made.
- Such a drop would be “very much reminiscent of what happened in the 1930s” when investors came to grips with the Great Recession’s prolonged fallout and sold off risk assets, the economist added.
- Shilling reiterated his love for Treasurys, noting he’s advocated for the safe-haven asset since 1981 and still thinks they’re “a great buy.”
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The stock market faces a second, Great Depression-style downturn if investors realize how long-lasting the coronavirus’ fallout will be, economist Gary Shilling said.
Equities have cooled from their surging bull run as investors mull the odds of a second economic slump and the effectiveness of nationwide reopenings. The market’s meteoric rise through the second quarter mirrors a similar move made in 1929, when equities soared after a steep plunge. The bounce-back didn’t last. Markets tanked a second time in the early 1930s as investors stepped back and grasped the Great Depression’s economic toll.
When today’s market participants similarly comprehend the virus threat, history will repeat itself and valuations will crumble, Shilling said.
“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,” the economist said in a CNBC interview published Monday.
He continued: “That’s why I think stocks could decline from here another 30% or 40%, and that might be optimistic.”
Shilling isn’t new to calling market crashes. The economist correctly called the housing-market bust well before 2008, warning the sector collapse would drag the entire economy down with it. He also predicted the bond market rally just before it began in 1981 and has since praised such assets for their stability.
Shilling’s love for Treasurys only grew stronger in the wake of the coronavirus and resulting market volatility. The economist expects a downward pressure on prices to benefit Treasury bonds and further extend a rally that began before the coronavirus turned global.
“I’ve been an advocate of bonds for 39 years and I still think they’re a great buy,” Shilling said. “If you look back at what has happened since the first of the year, the bond market started rallying literally the first trading day of the year. That was an indicator that we’ve got big problems.”
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