Market Extra: Wall Street is again worried about an imminent recession. Here’s what the data show, and what it might mean for your portfolio.

Economists polled by The Wall Street Journal believe the U.S. economy is coming off its hottest summer stretch since 2020.

But if that proves to be true, then why are Wall Street luminaries like Bill Gross and Bill Ackman warning that a long-expected economic downturn has already begun? Gross even said that a recession could commence before the end of 2023, which is less than three months away.

For better or worse, investors seem to be taking these warnings seriously. They’ve been blamed for helping send Treasury yields lower after the 10-year
BX:TMUBMUSD10Y
briefly pierced 5% on Monday for the first time since 2007.

See: Bill Ackman cashes out bet against Treasury bonds as yields hit 16-year highs

See: Why Bill Gross expects a U.S. recession to begin by year’s end

As investors await the release of U.S. third-quarter GDP data on Thursday, which is expected to show that the economy expanded at a 4.7% pace from the beginning of July through the end of September, some, including former Merrill Lynch economist David Rosenberg, have warned that a “summer bump” in U.S. economic activity is already fading.

See: GDP bonanza: U.S. economy may have grown 5% in the third quarter

Rosenberg rattled off a litany of evidence to support the case that Wall Street’s hopes for a soft landing have been misplaced, noting that consumers appear to have finally exhausted their pandemic savings as borrowing costs start to bite. That millions of borrowers had to start repaying student loans again in October likely hasn’t helped.

“What comes next is the end of the ‘soft landing’ and the natural transition to the ‘hard landing.’ We have no intention of dropping the recession call now any more than when I was under similar pressure to do so in the fall of 2000 and spring of 2007,” Rosenberg said in a note from Rosenberg Research shared with MarketWatch on Tuesday.

Evidence is already showing up on corporate earnings calls and in their guidance. During a post-earnings call with analysts and the media last week, Bank of America CEO Brian Moynihan warned that the strength of the U.S. consumer appeared to be on the wane.

“Frankly, the Fed has won the battle of the American consumer — they are slowing down. And the question is what happens next,” Moynihan said at the time.

Meanwhile, United Airlines
UAL,
-0.31%

and Tesla Inc.
TSLA,
+0.65%
,
among others, have issued softer guidance, another sign of weakening demand.

What’s more, some of the more obscure data and surveys that have been released over the past month seem to contradict the strength of the September jobs report and the Census Bureau’s latest reading on retail sales.

In particular, Rosenberg cited the ISM Services New Orders Index, the NFIB’s Small Business Optimism Index, the National Association of Realtor’s existing home-sales, readings on consumer sentiment and confidence as well as data on manufacturing and services activity from regional Fed banks like the Philly Fed and Dallas Fed, among others.

The Federal Reserve’s latest Beige Book, a collection of anecdotes and attestations on the state of the regional economy, also hinted at weakness beneath the surface. As MarketWatch reported when it was released last week, the Beige Book hinted at “slightly weaker” growth early in the fall season.

See: Beige Book sees ‘slightly weaker’ U.S. economy — and easing inflation

Looming over everything are rising Treasury yields, which have reached their highest levels since 2007.

The higher they go, the higher the risk that “something will break,” said Gregory Daco, chief economist at EY Parthenon.

“This month, I will highlight why we’re growing increasingly concerned about the economic outlook at a time when the consensus is shifting more optimistic,” Daco said in his latest monthly outlook, released Tuesday.

“In particular, my concerns stem from the recent tightening in financial conditions driven by the rapid rise in long-term rates and the lack of policy anchors to navigate these turbulent times.”

Then there’s also the Israel-Hamas war, which could throw a wrench in the works of the global economy if it metastasizes into a broader conflict, potentially impacting oil prices, Daco said.

Assuming the U.S. economy is teetering on the cliff’s edge, what can investors do to prepare? Rosenberg recommended a heterogenous mix of risky and safe assets.

“Safe-havens such as bonds and bullion will remain in vogue, and growth stocks will be supported by the move lower in long-term interest rates,” he said.

Joseph Quinlan, head of CIO Market Strategy at Bank of America’s Private Bank, said in a report that a recession should be a buying opportunity for bonds and stocks.

“Recessions — or the threat thereof — should be bought, not sold, notwithstanding the swirl of negative macro news,” he said in a report shared with MarketWatch.

To be sure, investors have reason to take these warnings with a grain of salt. Just over one year ago, a Bloomberg survey showed 100% of respondents had expected a recession to begin within the next 12 months.

Those expectations ended up being dead wrong. Still, the same survey now puts odds of a recession recession during the coming year at 55%.

Maybe these forecasters will have better luck during the year ahead. Or maybe the COVID-19 pandemic has rewritten the rules of the economy, making it more difficult, or even impossible, to make accurate predictions.

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