KUALA LUMPUR (May 7): 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 published on May 7, the Wall Street veteran — 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 US job market continues to weaken.

That could be the final blow to the stock market rally fuelled 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.

Shilling said the economy has already been flashing key signs of weakness as high interest rates take their toll. The labour 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, he said.

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 labour 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.

Shilling was quoted as saying a handful of recession indicators have been sounding the alarm on the economy for months.

He said the 2-10 Treasury yield curve, the bond market's most famous recession gauge, has been signalling 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.