S&P 500 to plunge 27% and bonds to rally again this year predicts veteran guru Gary ShillingPosted on 10 February 2013 with 6 comments from readers
Perennial bear and long-standing bond bull Dr. Gary Shilling is sticking his neck out where few other commentators will dare to go at the moment and predicts a 27 per cent fall in the S&P 500 this year.
His latest Insight newsletter concludes: ‘We estimate that S&P 500 operating earnings will be $80 this year and that the P/E will drop to 13 in the global recessionary climate, about the average in past bear markets, and the S&P 500 index would fall to 1,040, a 27% decline from its 1,426 level at the end of 2012. Other major stock markets should show similar weakness, replacing the euphoria of the Grand Disconnect.’
The ‘Great Disconnect’ is the contradiction between low or no growth in the global economy and its soaring stock markets. Dr. Shilling demonstrates how financial leverage or borrowing is the cause of this disconnection in his latest newsletter. Public debt has replaced private debt in recent years.
The problem is that this rocket fuel is having less and less impact on financial markets which must eventually return to earth, or shall we say fair valuation. And the flipside of this is a perhaps final leg in the great bond bull market that Dr. Shilling correctly called three decades ago.
So not only is he one of the very few Wall Street commentators to call a crash, he is also not among those looking for a ‘Great Rotation’ from bonds to stocks, quite the reverse! What then will trigger this stock market crash?
Dr. Shilling says: ‘Forecasting specific jolts is hazardous, although we can list several possibilities, including a hard landing in China or an oil price leap, triggered by an Iran-related blow-up in the Middle East, or the failure of a major European bank or a US recession, which would be a major shock to bullish investors, especially since so many believe the American economy is on the mend.’
All of the above?
Or perhaps all of the above! ArabianMoney has recently highlighted severe doubts about the positive data coming out of China. Iran has just specifically rejected talks with the US on nuclear issues, what is the next step? European banks are still vulnerable to sovereign debt shocks. And the possibility of a US recession looms large after the contraction in Q4 last year.
Could the world economy be about to succumb to a series of body blows precipitating a 1974 or 1987-style financial market meltdown?
Dr. Shilling has been very right on bonds and mainly wrong on equities for sometime. But if you call a downturn for long enough it will usually happen, normally when everybody else is very complacent, like now.