Investment experts and economists are sounding alarms about the state of the U.S. economy, raising concerns about a potential recession next year.
"Our view is that we're going to have a recession in the back half of next year, and the Fed is at or near the end of the hiking cycle," said Sara Devereux, principal and global head of fixed income at Vanguard.
Seasoned investors like Warren Buffett echoed a similar sentiment during Berkshire Hathaway's annual meeting. Buffett acknowledged that the period of growth for the U.S. economy appears to be slowing down. He noted that most of the company's businesses would likely report lower earnings than last year.
Several factors, including persistently high inflation, rising interest rates and the ongoing banking crisis, have contributed to the growing caution among investors, including Buffett and his long-time business partner, Charlie Munger.
This cautious approach is driven by concerns about potential investment gains in the coming year, with Munger affirming the need for investors to "get used to making less."
Bill Gross, co-founder of investment management firm Pacific Investment Management Co. (PIMCO), has also weighed in on the impending economic challenges.
"Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly. Recession in 4th quarter," Gross wrote on X.
Vanguard anticipates 'hawkish hold'
Despite these warnings and predictions, it's worth noting that the U.S. economy has defied expectations in the past. Many experts had foreseen a recession in 2023, but the country experienced surprisingly strong growth. The Commerce Department reported that the gross domestic product grew at a 4.9 percent annual pace in the third quarter.
According to Devereux, the full impact of the Federal Reserve's rate hikes is yet to be realized in the economy. Investors also still have the option to invest in relatively secure fixed-income assets that promise high yields.
Amid the economic slowdown, Devereux expressed Vanguard's anticipation of a "hawkish hold" by the Fed on interest rates, saying the central bank would not "cut them at the first sign of stress."
Devereux also cautioned investors against delaying bond purchases. She noted that despite the situation, high coupon rates imply that significant yield increases would be necessary to cause losses for bondholders.
"For people who are a little worried about jumping in now — when do I get in, when do I not — you have a lot of cushion," she said.
Recession-resistant investment strategies
Buffett and Munger advocate against a complete retreat from the market. Instead, they propose strategies for investors to navigate the shifting economic landscape.
Some service sectors remain relatively insulated from broader economic turbulence. These industries are typically bolstered by tangible, recession-resistant assets that maintain their value, even during periods of inflation.
For example, Caretrust REIT (CTRE), a real estate investment trust, owns and operates healthcare properties across the U.S., providing a potential hedge against economic downturns.
Caretrust operates across 23 states with 204 properties and a total of 21,795 hospital beds, effectively representing a significant segment of the private healthcare industry in the United States. In addition, its current dividend yield of 5.56 percent presents an appealing opportunity for investors in search of financial security in times of economic downturns.
Meanwhile, to prepare for the uncertain economic landscape, Gross is diversifying his investments into various bonds across the Treasury yield curve and exploring SOFR (Secured Overnight Financing Rate) futures, which are linked to a floating rate lending benchmark. In equities, he is focusing on equity arbitrage.