Shilling: Stock Rally is A Bubble

Thursday, November 5, 2009 10:43 AM

Shilling: Stock Rally is A Bubble
By: Dan Weil

The stock market’s 65 percent jump from its March lows represents a bubble, says market guru Gary Shilling.

“I think there's been a bubble in stocks,” he told Forbes. He says the market could drop 35 percent.

“People have been anxious to get aboard. There was a realization earlier this year that the financial structure was not going to disappear into the earth. And that was certainly cause for a revival in stocks.”

But that didn’t justify such a sharp move, Shilling says. “To me, they've way outrun reality.”

“Consumers are still very cautious. They're still retrenching. They're still pushing their saving rate up for the first time in 25 years.”

As a result, he thinks the economy could reverse from a 3.5 percent expansion in the third quarter to a contraction in the fourth quarter and the first half of next year.

“That would be a big shock and disappointment to all those who have thought that this is a “V” bottom, that the recession is over, that we're going to have a rapid revival, we're going to go back to the good old days,” Shilling says.

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