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Stocks  | March 22, 2019

Even as many investors turn more bullish about the stock market amid 2019’s strong comeback, some market watchers remain unconvinced, with one prominent bear suggesting that the U.S. economy has a "two-thirds probability" of sliding into a "normal" recession this year.

According to the respected financial analyst Gary Shilling, president of A. Gary Shilling & Co., in eight previous instances in which the economy shrunk, stocks have been pushed down down an average of 21% into bear market territory. Shilling's outlook, which he stresses does not forecast a full-blown collapse like he projected in 2018, is based on a long and growing list of recessionary red flags he outlines in a detailed Bloomberg column. To prepare for this downdraft, the Real Investment Report suggests investor take five key steps to bolster their stock portfolios, per MarketWatch.

Recessionary Indicators

  • Tighter monetary policy
  • Near-inversion in the Treasury yield curve
  • Weaker housing activity
  • Soft consumer spending
  • Macro concerns like trade wars, slowing economic growth abroad

Source: Shilling, per Bloomberg

Recessions Born Out of Normal Late Economic Cycle

Recessionary indicators flagged by Shilling include tighter monetary policy by the Fed, which has recently taken a more dovish stance, as well as the near-inversion in the Treasury yield curve. Other negative indicators cited by the market vet include weaker housing activity, soft consumer spending, the “swoon in stocks at the end of last year,” a smaller increase in February payrolls, and other macro concerns like U.S.-China trade wars and problems in Europe.

“The remaining eight post-World War II recessions were not the result of major financial or economic excesses, but just the normal late economic cycle business and investor overconfidence,” he noted. Shilling does not see any major economic or financial bubbles in the current environment, but does cite headwinds such as excess corporate debt and heavy borrowing in dollars by emerging market economies. He adds that the housing market has yet to make a full recovery over the decade, while the financial sector is still in the process of deleveraging, and consumer debt remains “substantial.”

Goldilocks View Is ‘Absolute Nonsense’

Real Investment Report’s Lance Roberts echoed Shilling’s bearish sentiment in his report posted over the weekend. He suggests that the prevalent idea on the Street that the Goldilocks economy and the bull market are alive and well, is “absolute nonsense,” and that those with such an outlook “have forgotten the last time the U.S. entered into such a state of ‘economic bliss.’”

“Unfortunately, today’s Goldilocks economy is more akin to what we saw in 2007 than most would like to admit,” he wrote. He remains unenthused by economic growth at 2%, with inflation near zero and only being kept afloat by infusions from central banks.

To defend against a major market crash, Roberts recommends investors take preemptive action. First, he suggests upping trailing stop losses, a type of trade order aimed at protecting investors from a security’s downside. Another smart move would be to trim positions that currently represent big portfolio winners back to their original portfolio weighting.

“Sell underperforming positions,” he wrote. “If a position hasn’t performed during the rally over the last three months, it is weak for a reason and will likely lead the decline on the way down.”

Roberts also recommends ditching positions that have performed with the market, sticking only with the outperformers.

Lastly, investors would be wise to reevaluate their portfolio allocation relative to risk tolerance, recommends the analyst. For those who are currently overweight in equities, it would be beneficial to recall 2008, and raise cash levels and increase fixed income accordingly.

Looking Ahead

Despite the myriad of negative indicators appearing in the current environment, Shilling notes that there is still a chance of a “soft landing,” such as that in the mid-1990s. He notes that it is also possible that the current economic softening is only short-term, although that would likely bring about more Fed restraint.

“With a resumption in economic growth, a tight credit-induced recession would be postponed until 2020,” wrote Shilling.


A revolutionary initiative is helping average Americans find quick and lasting stock market success.

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