Legendary economist A. Gary Shilling issued a warning in his latest Bloomberg article, and he didn’t waste any time letting the reader know his thoughts on the recent stock market rally.
“Don’t be fooled by the recent rebound in stocks,” Shilling says, before laying out a compelling case that the current rally simply mimics other bear market rallies throughout history.
He says that today’s “investment scene” is starting to look a lot like the 1929 market crash and the early 1930s Great Depression.
Shilling points to the Dow Jones Industrial Average, which gained 500% from August 1921 to September 1929 before falling 48% over the course of 10 weeks. At the time, the drop seemed like a natural correction from the exuberance of the ‘Roaring ‘20s.’
The market bounced back from the correction, gaining 48% by April 17, 1930 to offset roughly 50% of the original loss. Soon after, the country completely fell into the depths of the Great Depression. By July 8, 1932, the stock market fell 86% from the September 1929 high.
Shilling draws parallels to the S&P 500 climbing 400% from the March 9, 2009 lows to the recent highs in mid-February.
As fears over the spread of the coronavirus took hold, the S&P 500 dropped 34% before bottoming on March 23. The market has now rallied to offset roughly 50% of the original loss.
Where Stocks Head From Here
Shilling says that while stocks have rebounded since the March lows, the market may not be able to keep outrunning the bad news piling up in the economy.
“This looks like a bear market rally, similar to that in 1929-1930, with an additional 30% to 40% drop in stocks to come as the deep global recession stretches into 2021.”
He then points to research that stock market corrections simply don’t happen this quickly.
“Bear markets that accompany recessions last about 11 months, far longer than the recent slump. According to Bank of America analysts, the U.S. stock market has never reached its bottom in less than six months after falling more than 30% in the face of a recession.”
Shilling also says that despite the Federal Reserve’s best intentions, history has shown that massive stimulus never results in a quick and easy recovery.
“The gigantic monthly and fiscal stimulus employed so far, with more to come, are unlikely to offset the massive disruption of the coronavirus pandemic. Recall that the Federal Reserve’s decision to cut its benchmark interest rate to essentially zero coupled with the huge quantitative easing after the Great Recession did little to spur the economy, which grew at the slowest rate of any post-World War II expansion. Ditto for the gigantic 2009 tax cuts, rebates and massive federal sending that together amounted to 6% percent of gross domestic product.”
He concludes by saying the pandemic hit at the worst-possible time and we likely won’t even begin to recover until there’s a vaccine.
“This pandemic is likely to be the most disruptive financial and social event since World War II with equally long-lasting consequences. Many will no doubt restrain spending in future years to rebuild savings, especially since the crisis caught them at a time of high debts and short financial reserves,” before adding “A widespread economic revival is unlikely until a vaccine and widespread testing are available.”