The U.S. will be in a recession by the second half of 2022, and investors should be prepared for a 30% decline, says David Rosenberg, founder of the economic consulting firm Rosenberg Research & Associates, according to an article in Advisor Perspectives. However, 2 years ago Rosenberg said that U.S. equity market bulls were in “fantasyland” and last year he said that inflation was temporary and to go in on bonds and growth stocks—predictions that turned out to be wildly inaccurate.
Speaking at the Strategic Investment Conference, Rosenberg said the next sector to be hit will be the housing market. He noted that there’s never been a recession that hasn’t come alongside a bear market in stocks, with the average decline being about 30%. He said the Fed’s policy will weaken the economy, causing a 2.8% decline in GDP as well as a contraction in demand. Out of the 14 Fed hiking cycles in the past, 11 resulted in recessions, the article cites Rosenberg as saying.
Still, Rosenberg believes that inflation will subside soon, and that supply-chain concerns are overblown. Inflation isn’t about demand, he said; rather it’s about supply shortages stemming from Russia and Ukraine and China shutting off its ports. However, if food and energy inflation rises above 8%, that would cause a recession. But while companies have used this period of inflation to boost profit margins—tantamount to price gouging, Rosenberg said—consumers are starting to resist.
Rosenberg called the yield curve and unemployment rate the most important economic measurements. Indeed, the yield curve would seem to confirm his prediction about a coming recession, as it inverted on April 1st, indicating an “outright or growth recession,” according to Rosenberg. And historically, a low unemployment rate comes before a recession by 8 or 9 months out, then peaks just after the recession ends.
Meanwhile, Rosenberg’s advice for investors during this time is to increase credit quality in bonds and take a defensive position in stocks. Stay away from emerging markets, commodities and junk bonds and lean more towards utilities and dividend-payers in non-cyclical industries. Real estate will also take a hit. But Rosenberg also said that his views are meant for investors who have a time horizon in sight on this business cycle, and not for those that look beyond and take the long view.
