BlackRock Warns to Prepare for Recession ‘Unlike Any Other’

A trader works on the floor of the New York Stock Exchange in a file photo. Mario Tama/Getty Images

Investment fund BlackRock warned that 2023 may produce a worldwide recession “unlike any other” and said that what worked during previous recessions “won’t work now.”

Analysts with BlackRock—a controversial investment fund that has pushed for environmental, social, and corporate governance, or ESG—say that the worldwide economy has entered a phase of higher volatility and that a recession is likely imminent after central banks such as the U.S. Federal Reserve have raised interest rates to curb decades-high inflation. Because of these actions, it said, there will be more market disturbances than in previous years.

“Recession is foretold as central banks race to try to tame inflation. It’s the opposite of past recessions,” BlackRock’s team said in the firm’s 2023 Global Outlook (pdf), released this week. It said that a deep recession may be the only way to tame inflation, which in the U.S., reached over 9 percent year-over-year in June 2022.

When the economy dips further, BlackRock warned: “Central bankers won’t ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect” and “are deliberately causing recessions by overtightening policy to try to rein in inflation.

“That makes recession foretold. We see central banks eventually backing off from rate hikes as the economic damage becomes reality,” the firm said. “We expect inflation to cool but stay persistently higher than central bank targets of 2 percent.

“What worked in the past won’t work now,” BlackRock’s strategists said. “The old playbook of simply ‘buying the dip’ doesn’t apply in this regime of sharper trade-offs and greater macro volatility. We don’t see a return to conditions that will sustain a joint bull market in stocks and bonds of the kind we experienced in the prior decade.”

To deal with the coming downturn, the company recommended more regular portfolio changes and taking a "granular view on sectors, regions, and sub-asset classes.

“We don’t think equities are fully priced for recession,” BlackRock added. “Corporate earnings expectations have yet to fully reflect even a modest recession. This keeps us tactically underweight developed market equities.”

More Warnings

A number of Wall Street banks like Morgan Stanley and Bank of America have warned that U.S. stocks could drop by 20 percent or more in 2023 due to a recession, in part, triggered by the Federal Reserve’s recent interest rate hikes. Rates are expected to hit 4.5 percent to 4.75 percent in 2023, according to the central bank’s own recent projections.

A 'for sale' sign hangs in front of a home in Miami, Fla., on June 21, 2022. Joe Raedle/Getty Images

There has also been a slowdown in the U.S. housing market due to decades-high mortgages rates. The current average rate for the benchmark 30-year fixed mortgage is about 7.32 percent, up 15 basis points over the past week.

Citi Global Wealth Investments on Friday, meanwhile, said a 2023 recession could be “mild” and speculated U.S. unemployment would exceed 5 percent. A total of 2 million jobs, including 400,000 construction jobs, would disappear next year, it said.

“Housing that was started a year ago was at a higher sales pace and a dramatically lower mortgage rate,” said Steven Wieting, chief investment strategist and chief economist at Citi in the group’s latest outlook report.

He added: “While they finish those houses, they’re still employed. Then when you are done with that house you don’t have a new job to go to—and that’s how the coming year we think we lose all of those jobs.”

A group of economists surveyed by Bloomberg Friday projected the Federal Reserve will raise rates to 4.9 percent in 2023 and keep it there until 2024. Fed policymakers are slated to meet again next week, and analysts have predicted that the central bank will raise rates by another 50 basis points.

The surveyed economists expect the Fed to cut rates to 4 percent by mid-2024 and then to 3.5 percent by the end of that year.

Fed Chairman Jerome Powell in November suggested that the central bank would slow its rate hikes.

“The time for moderating the pace of rate increases may come as soon as the December meeting,” Powell said at the Brookings Institute in November. “Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.”