Billionaire quant Cliff Asness says conflicting signals around the Fed's next move could cause a 'scary' sell-off in stocks as recession strikes

Lucy Nicholson/Reuters

• Stocks could see a "scary" sell-off if a recession hits the US economy, Cliff Asness said.
• The quant billionaire pointed to an alarming disconnect between how stocks and bonds are positioned.
• Experts have been warning of recession over the last year, as high interest rates put pressure on the economy.

Stocks and bonds are sending conflicting signals about the economy — and there could be a scary sell-off in stocks if a recession hits, according to billionaire investor Cliff Asness.

In an interview with Bloomberg on Monday, the quant guru pointed to different economic outlooks priced in the bond market and in the stock market, which he called his "biggest concern" in the current macro environment.

Though stocks are being carried by a more buoyant outlook on the economy, the bond market is pricing in steep interest-rate cuts over the next few years, which experts say would likely only happen if the US entered a recession.

The bond market is currently forecasting a more-than-mild recession given the pace of expected rate cuts, Asness said. If the US does see a downturn, that could spark a steep sell off in the stocks, he warned.

"If inflation stays sticky or it comes down because we enter a nontrivial recession – it's equities that I think are in a scary place," he added. 'They're not priced very consistently with bonds." 

Economists have been flagging the risk of recession over the past year, as the central bank aggressively raised interest rates to tackle high inflation. High rates threaten to overtighten the economy into a downturn, and interest rates are currently at their highest level since 2007.

But central bankers have warned rates are likely to stay elevated for the rest of 2023 as inflation remains a threat. Prices clocked in at 4.9% in April – still well-above the Fed's 2% long-run inflation target. Meanwhile, core inflation accelerated 0.4% from the last month, which suggests that price pressures are still lingering in the economy.

The Fed's own economists have started forecasting a recession to strike later this year, with the New York Fed foreseeing a 68% chance a downturn will come by April 2024. Even a mild recession could cause stocks to tumble 15%, JPMorgan strategists said.

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