Legendary economist Gary Shilling has extended his warning on the state of the economy, cautioning that the United States is likely heading toward a significant recession and a major stock market sell-off.
Shilling, president of A. Gary Shilling & Co. said the broader economic backdrop remains fragile, arguing that there is little fundamental support underpinning the U.S. economy, he said in an interview with David Lin published on May 15.
According to the veteran economist, the weakening environment could trigger a broader downturn affecting stocks and the wider corporate sector.
He described the current market as a “risk-off” environment despite strong bullish sentiment among investors and speculators.
Shilling suggested that optimism surrounding the economy and financial markets has become excessive, particularly in equities, where speculative activity continues to surge.
“There just isn’t a lot of basic support for the U.S. economy, and as a result, I think we’re very likely to have a considerable recession and sell-off in stocks. <…> This is a risk-off environment. That’s not a very popular belief right now because there are many investors and even more speculators who think things are going to the moon,” he said.
Lessons from past recessions
The economist also warned that many of the conditions present today resemble those seen before previous bear markets and recessions.
He pointed to the large amount of liquidity circulating in markets and the growing flow of capital into speculative assets as signs of elevated financial risk.
Shilling further argued that the U.S. economy has become increasingly dependent on spending by wealthier consumers.
The expert cautioned that if higher-income households reduce spending for any reason, economic activity could weaken sharply, increasing recession risks.
The warning comes at a time when markets remain volatile despite notching several record highs.
For instance, the S&P 500 recently reached a record high of about 7,500 before retreating amid broader market concerns over geopolitical tensions between the United States and Iran, as well as growing fears about rising inflation.
