Lately, the prospect of an economic slowdown has struck fear into traders and economists alike.
This month, The World Bank slashed its projection for global economic growth. The Dow (^DJI) fell 810 points, or 2.4%, on Tuesday in part over concerns of a downturn. And Deutsche Bank raised the possibility of a “major recession” as result of Federal Reserve rate hikes and asset tapering in a recent note.
In a new interview, Wall Street veteran and investing guru Sallie Krawcheck took those fears one step further, saying a recession is inevitable. While she acknowledged the timeline and nature of the downturn remain uncertain, Krawcheck urged investors to diversify their holdings in order to withstand the hard economic times.
“Sure, a recession is on the way,” says Krawcheck, the co-founder and CEO of an investing platform for women called Ellevest. “I don’t know when. Nobody knows when. Inflation will go up at some point [and] down at some point.”
As the U.S. struggles with its worst bout of inflation in four decades, the Federal Reserve signaled an aggressive series of rate hikes that may tame cost increases, but could also cool economic growth.
Federal Reserve Chairman Jerome Powell last Thursday expressed openness to a 50-basis point rate hike in May, noting the potential benefits of “front loading” the central bank’s policy moves.
The onset of tight monetary policy “will push the economy into a significant recession by late next year,” Deutsche Bank Head of Research David Folkerts-Landau warned in his note on Tuesday.
To be sure, some observers have rejected fears of a recession. Canaccord strategist Tony Dwyer told CNBC last month that concern about a recession based on an inversion in parts of the treasury yield curve has been overstated.
Since “the market is so often wrong,” traders should diversify their portfolios as a hedge against a range of outcomes, said Krawcheck, who formerly led the Wealth Management divisions at both Merrill Lynch and Citi (C).
“A diversified portfolio is what matters because the number of active managers who correctly call this stuff consistently, you and I both know, is a tiny, single-digit percentage,” she says.
Krawcheck began her career on Wall Street as a junior analyst at Solomon Brothers in the late 1980s. Since then, she’s witnessed several recessions over more than three decades working in the finance industry, most notably the Great Recession of 2008, when she held a front row seat as a top executive in wealth management at Citi.
Speaking to Yahoo Finance, Krawcheck said attempts to play the market in the short term often lead investors astray.
“We tell our women, ‘Investing should be sort of boring,'”she says “It shouldn’t be all about making the calls.”