THE US WILL SEE A RECESSION BY YEAR-END THAT COULD SPARK A 30% DROP IN THE STOCK MARKET, LEGENDARY FORECASTER GARY SHILLING SAYS

• A coming recession could end up sparking a "violent correction" in stocks, Gary Shilling told BI.
• The top forecaster pointed to warning signs of a downturn, such as a weaker job market.

Investors should be prepared for a recession with the potential to send the stock market plummeting this year, according to top forecaster Gary Shilling.

In an interview with Business Insider, the Wall Street vet — who was among the investors in the mid-2000s to call the subprime mortgage bubble — said he saw a recession coming by the end of the year as the job market continues to weaken. That could be the final blow to the stock market rally fueled by investor overconfidence, causing stocks to drop by as much as 30%, Shilling said.

Shilling pointed to the recent run-up in risky assets, such as stocks and cryptocurrency. That itself is a sign the market is poised to drop, especially once a downturn gets underway, he said.

"You look at all the kind of speculation that we've had out there, it's indicative of a lot of overconfidence, and that usually gets corrected and corrected violently," he said.

The economy has already been flashing key signs of weakness as high interest rates take their toll. The labor market is weakening, with the unemployment rate sticking close to a two-year high in March.

Meanwhile, quit rates slumped to around 2% in March, a sign that workers are waking up to difficult hiring conditions and are less willing to leave their jobs than they were in the past.

The job market, for one, is "obviously slipping" as firms pull back on hiring, Shilling said.

Shilling believes companies have held onto more workers than they needed due to the shortage of labor that slammed employers during the pandemic. Layoffs will escalate later this year, with unemployment peaking at 5%-7% as the economy continues to weaken, he predicted.

"Employers wanted to hang onto their workforce and even add to it, because they figured things were going to be tight forever. Well, they haven't been tight forever. The economy's growth has been slipping … Employers are simply cutting back," Shilling warned.

Job losses could end up hitting Americans hard, especially since there are signs that many may be in worse shape financially than they were several years ago. Consumers probably blew through the last of their excess savings from the pandemic in March, San Francisco Fed economists estimated.

Meanwhile, a handful of recession indicators have been sounding the alarm on the economy for months. The 2-10 Treasury yield curve, the bond market's most famous recession gauge, has been signaling a downturn since July 2022. The Conference Board's Leading Economic Index, another gauge of economic strength, ticked lower in April, though the measure is not yet in recessionary territory.

"When you start to see the softness in these indicators and the actual turn down in business can be long and variable, but they are reliable enough, and I think that the safe bet is for a recession starting later this year if we're not already in it," Shilling said.

Shilling is known for his contrarian and often bearish takes on the market. Previously, he told Business Insider he looks to actively disagree with other Wall Street strategists, as the consensus view is typically already discounted in markets.

"I think people are being overly optimistic and hopeful in the face of a lot of evidence to the contrary," he warned.