Gary Shilling: Sell Stocks; A Recession is Coming

Get out of stocks, according to Gary Shilling, who has gone to 30% cash in the portfolios he manages. The economy will be in recession by the end of the year, and stocks will fall in response.

Shilling runs the New Jersey-based economic consulting firm that bears his name, A. Gary Shilling & Company, and is the author of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, published in 2010. He spoke yesterday as part of a webinar sponsored by Wealth Trust asset Management.

The volatility in U.S. equities is typical of a market top and is a warning sign of an imminent decline, according to Shilling. The question is whether to ride it out. His research demonstrates that buy and hold is not a better strategy than trading.

If one excluded the 50 best performing post-war months, the return from equities was no better than from Treasury bills. But avoiding the weak months was more important. It is “grade-school math,” according to Shilling: If you lose 50% of the value of your assets, you must make 100% to get even.

“Take a lot of money off the table,” he said.

Stocks are very expensive. The 10-year CAPE ratio is 37.4 versus its average of 17.1. It would take a 55% decline to get back to the long-term CAPE average and, Shilling warned, markets usually overshoot to the downside.

Stocks are vulnerable because the Fed is “behind the curve,” he said. When the Fed starts hiking rates, a recession follows most of the time.

“A soft landing is very much against the odds,” Shilling said.