Investors need to prepare as signs build that a recession is coming, according to Bank of America strategist Michael Hartnett. A multitude of factors, from weak manufacturing and services readings to diminishing payroll growth and oil price increases, are pointing increasingly to a downturn that Hartnett thinks could cause some investors to be offsides. The “drumbeat of recession [is] getting ever louder,” the investment strategist said in his weekly “Flow Show” note that looks at where money is moving. Hartnett noted that the $403.4 billion that has gone into cash over the past four weeks is the most since April 2020. However, the firm’s “Bull & Bear” indicator is reflecting more pessimistic views but still isn’t at a point that would reflect a contrarian buy call. He recommended a variety of ways investors can ready their portfolios for the coming downturn. Hartnett’s “best plays for start of recession” include Treasury bills, which he said outperform until the Federal Reserve starts cutting rates. He also likes yield-curve steepeners, which generally entail bets that spreads on rates will rise. In this case, Hartnett likes that play in anticipation that the Federal Reserve likely will have to begin easing as unemployment rises later in the year. Gold is the “best US dollar debasement play,” he added, while he also likes short plays on “over-owned assets” such as corporate bonds, tech stocks, industrial and defense equities, shares of luxury companies based in the European Union and U.S. private equity. And, of course, nothing lasts forever, so Hartnett advises investors to prepare a “shopping list” of things to buy when conditions change. When the labor market indicates a recession, he said the best buys will be “distressed cyclicals” such as banks, real estate investment trusts, small-cap stocks and commodities. Hartnett said Friday’s nonfarm payrolls report that showed growth of 236,000, combined with February’s 326,000, will be “the last strong payroll reports of 2023.” He also pointed to weak ISM manufacturing and services surveys. The March manufacturing reading of 46.3 was the lowest since May 2020; readings below 45 have coincided with recessions 11 of the past 12 times, according to Hartnett. At the same time, the ISM nonmanufacturing reading was the fourth lowest since the Great Financial Crisis.
