Since the U.S. Federal Reserve started raising interest rates in early 2022, recession fears have increased.
David Rosenberg, president of Rosenberg Research and a former Merrill Lynch top North American economist, believes that even if the most recent gross domestic product (GDP) data showed increase, a recession may be just around the corner.
In a recent Blockworks Macro video interview, he said that the recession is truly commencing this quarter based on the leading indications. “If not this quarter, I believe it will be the following. Definitely not a 2024 story.
Many Americans are struggling with incomes that are unable to keep up with the rising cost of living due to widespread inflation. Greater financial troubles might follow if a recession actually happens.
“A recession is a very serious forecast because it represents a reduction in the national income. It’s like the entire nation gets a wage reduction,” says Rosenberg. It’s not like we reduce the Lamborghini from 80 to 20 horsepower. It is that we turn around.
A recession, meanwhile, might cause issues for the stock market.
2022 was a horrible year for stocks, with the S&P 500 falling 19.4%. Despite the fact that they have somewhat recovered in 2023—the benchmark index is up 9% year to date—Rosenberg doesn’t think the unrest is finished.
According to Rosenberg, “I am bearish on equities as an asset class,” and he doesn’t think “a recession is fully priced in.”
He has a pessimistic stance on stocks due to valuation issues.
I disagree with the valuations. I mean, the forward price-to-earnings ratio is 19 and we’re pushing against that,” he remarked. “So what do you get from that? like an earnings yield of 5.3%. I can obtain single-A triple-B business credit at 5.4 percent and move up the capital structure.
Rosenberg is saying that when contrasted to the earnings yield of stocks, investment-grade corporate bonds—triple B is the lowest credit rating still considered investment grade—now give respectable yields. Corporate credit may present a chance since debt has a larger claim on a company’s assets and income than equity does in its capital structure, meaning bondholders have a higher claim than shareholders.
For investors looking for yield, there are a lot of chances now that interest rates are rising. Today, a lot of savings accounts offer high interest rates. For investors who want to diversify their portfolios but are dissatisfied with the majority of savings accounts or certificates of deposit (CDs), private credit investments can offer even greater rewards.
For the S&P 500, Rosenberg has a price objective of roughly 3,200.
He bases the aim on the idea that the US economy will contract, which would cause a “classic 20% hit to earnings.” He also believes that multiples will bottom out at 15 or 16.
The S&P 500 is now trading at 4,169, so the economist’s target indicates a 23% decline.
Even while the situation is not ideal, there is a bright spot.
As usual in a recession, Rosenberg added, “it will be painful if you are long, but if you have the dry powder and the liquidity, you’ll be able to pick up assets at better levels.”
In other words, when a recession hits and stock prices fall, investors might benefit from lower prices by purchasing a dip.
Recessions are beautiful because they purge and transfer assets from weak to strong hands, he remarked.
Rosenberg’s current stock holdings are not as substantial as what you might anticipate given this estimate. According to him, his portfolio has the least amount of equity since 2007 in it.
Where is he investing his money, then?
“I have long-short strategies, bonds, gold, and some alternatives,” he stated. I’m attempting to be as uncorrelated from GDP as I can.