Fears of a recession have grown since the US Federal Reserve began raising interest rates in early 2022.
Although the latest gross domestic product (GDP) figures point to growth, a recession could be imminent according to David Rosenberg, president of Rosenberg Research and former chief North American economist at Merrill Lynch.
“Leading indicators are telling me the recession is actually starting this quarter,” he said in a recent YouTube interview with Blockworks Macro. “If it’s not this quarter, I think it will be the next quarter. This is definitely not a 2024 story.”
With soaring inflation, many Americans struggle with wages that struggle to keep up with the rising cost of living. If a recession were to materialize, it could lead to greater financial hardship.
“A recession is a really big call because it’s really a haircut on national income. It’s like the whole country taking a pay cut,” says Rosenberg. It’s not that we’re taking the Lamborghini from 80 to 20. It’s that we’re going the other way.”
Meanwhile, a recession could spell trouble for the stock market as well.
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Downside to come
Stocks have had a terrible run in 2022, with the S&P 500 plunging 19.4%. Although they’ve rebounded a bit in 2023 — the benchmark is up 9% year-to-date — Rosenberg doesn’t think the turmoil is over.
“I’m bearish on equities as an asset class,” Rosenberg said, adding that he doesn’t think “a recession is fully priced in.”
The reason for his negative outlook on equities has to do with valuation.
“I don’t like valuations. I mean, we’re pushing for a forward multiple of 19,” he said, referring to the forward price-earnings ratio. “So what does that get you?” Like 5.3% as earnings yield. I can take 5.4[%] in single-A triple-B business credit…find themselves in a better part of the capital structure.
What Rosenberg means is that investment-grade corporate bonds (triple B is the lowest credit rating yet classified as investment) now offer decent yields relative to the yield of equities. And because debt takes precedence over equity in a company’s capital structure – bondholders have a higher claim on a company’s assets and earnings than shareholders – corporate credit could be an opportunity.
Indeed, in a context of rising interest rates, many opportunities have appeared for investors looking for yield. Many savings accounts today pay high interest rates. Meanwhile, private credit investments can offer even greater returns for investors who want to diversify their portfolios but aren’t happy with most savings accounts or certificates of deposit (CDs).
From weak hands to strong hands
Rosenberg has a price target of around 3,200 for the S&P 500.
The target is based on his assumption that the US economy will enter a recession, resulting in a “classic 20% impact on earnings”. At the same time, he assumes that the multiples will bottom out at 15 or 16.
Given that the S&P 500 currently sits at 4,169, the economist’s target implies a 23% decline.
It’s not a good image, but there is a silver lining.
“It will be painful if you go long, but if you have the dry powder and the liquidity, you can recover assets to better levels like you always do in a recession,” Rosenberg said.
In other words, when the recession hits and stocks fall, investors can take advantage of better prices by buying the dip.
“The beauty of recessions is that they clean up and move assets from weak hands to strong hands,” he said.
As one would expect from this projection, Rosenberg is not heavily invested in stocks at this time. He said his portfolio had the lowest equity weighting since 2007.
So where does he put his money?
“I have long-short strategies, I have bonds, and I have gold, and I have alternatives,” he said. “I try to be as uncorrelated as possible with GDP.”
These days, it’s easy for retail investors to tap into recession-proof alternative assets like real estate – even with as little as $100. Additionally, some of these assets could help investors diversify their portfolios while providing a passive income stream.
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This article “It’s Like The Whole Country Takes A Pay Cut:” Top Economist Warns Of Recession And Another 23% Stock Drop, But Highlights Opportunity For Those With The ” dry powder” originally appeared on Benzinga.com
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