Legendary economist Gary Shilling says 'don't be fooled' by the market's recent bounce, and warns stocks could drop 40% next year

• Gary Shilling, an American economist and president of A. Gary Shilling & Co, warned investors to not be fooled by the recent rebound in stock prices in a Bloomberg op-ed column on Thursday.
• Shilling drew parallels between the current market downturn, the 1929 market crash and the 1930s great depression to sound the alarm on "the most disruptive financial and social event since World War II."
• "Bear markets that accompany recessions last about 11 months, far longer than the recent slump," Shilling said of the current US equity index rallies.
• Shilling warned that in 2021 he believes stocks could fall as much as 40%.
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Veteran economist Gary Shilling wrote in a Bloomberg op-ed Thursday that the current market climate is starting to look a lot like the Great Depression.

"Don't be fooled by the recent rebound in stocks; the investment scene is beginning to resemble the 1929 market crash and the early 1930s Great Depression," Shilling wrote.

Despite Thursday's decline in major US equity indexes, April still served as the Dow and S&P 500's best month since 1987 as stock prices surged from late-March lows.

In his sobering column, Shilling made reference to the 48% plunge in the Dow Jones Industrial Average during the "roaring 20s" from September 3 to November 13, 1929 that "seemed like a reasonable correction" at the time.

"The economy was fully employed and growing rapidly and most looked forward to more expansion and higher stock prices," he wrote.

Prior to the 20s, Shilling wrote, the Dow had seen a matching 48% fall from January 19, 1906 to January 7, 1907 during the financial crisis spurred by the Panic of 1907 — the period that led to the creation of the Federal Reserve system.

The economist said although there was widespread interest in equities in the 20s, according to the Federal Deposit Insurance Corporation, only 10% of Americans owned any. The buyers that stepped in pushed stocks up 48% until April 17, 1930 but the bullish times didn't end well as the Dow eventually ended up losing 89% from its September 1929 high.

Shilling fears the current market will see the same fate.

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The economist wrote that while many expect a V-shaped economic rebound to deliver sharp recovery starting the second half of 2020, he is more skeptical as he believes "bear markets that accompany recessions last about 11 months, far longer than the recent slump."

He warned that the current trend looks like a bear market rally, similar to the one in 1929-30, and expects another 30%-40% drop in stocks as the global recession deepens into 2021.

Predicting the total decline in stock wealth will knock 2.8% off consumer spending, Shilling wrote the 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," he added.

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