- The investing environment is loaded with risks, according to top forecaster Gary Shilling.
- The legendary analyst has predicted as much of a 30% stock crash if the economy tips into recession.
- He gave investors five investment ideas to follow to hedge against future headwinds.
Stock market investors are facing the risk of huge losses as the economy slows, and there are five rules they should follow to prepare for future headwinds, according to elite forecaster Gary Shilling.
The Wall Street legend — known for his contrarian and often bearish predictions on the market — pointed to a slew of risks that face investors in the near future, including a potential recession.
Markets have been analyzing a handful of bearish signals already, Shilling said in a recent note to clients, pointing to the inverted Treasury yield curve — the bond market's notoriously reliable recession indicator — and leading economic indicators, which show the US is inching closer to a downturn.
The stock market's setup also looks troubling. Investors remain bullish as they anticipate the Federal Reserve cutting interest rates later this year, but central bankers are unlikely to slash rates anytime soon as they monitor inflation, Shilling said, which is bearish for stocks.
Equity prices look extreme by some valuation metrics. The cyclically-adjusted price price-earnings ratio of the S&P 500 is now 49% above its long-run average, Shilling said, another factor that makes the investing climate "unhealthy," Shilling said.
"This extremely speculative investment climate reveals two things. First, the basic economy is troubled; otherwise investors wouldn't turn to excess speculation. Second, it will end, sooner or later, with huge losses for speculators with lots of blood on the floor, and probably be followed by an era of cautious, conservative investments," he warned in a note on Monday.
Shilling outlined five rules investors should follow as they enter a more precarious investing environment.
- Bet long on the US dollar. Despite fears that other countries are shifting away from the dollar, the greenback remains the dominant currency in central bank reserves and in global trade. High interest rates are also a positive for the dollar against other currencies.
- Go long Treasury bonds. The price of US Treasuries, which is inversely related to yields, has risen as investors anticipate rate cuts from the Fed. As the Fed loosens financial conditions, yields are bound to come down, pushing bond prices higher.
- Steer clear of overhyped stocks, including Nvidia, the wider Magnificent Seven cohort, AI names, SPACs, and crypto. Those investments are "vastly overpriced" and "speculative," Shilling said.
- Pivot investments from China to India. Shilling has advised investors in Chinese stocks to switch to Indian assets for months, citing factors like better economic growth prospects and population growth.
- Hold onto cash until the economy and markets rebound.
Shilling has maintained a notably bearish view on stocks and the economy, despite more investors warming up to the possibility of soft landing. A coming recession could end up sparking a "violent correction" in equities, he previously told BI, predicting that a stock crash of as much as 30% was possible in a downturn.