Paul Tudor Jones II built a fortune currently worth over $8 billion. Much of his success is due to shrewd trades on currencies and interest rate moves. His Tudor Investment hedge fund is also heavily invested in stocks, with more than 50 equity positions, in addition to several call and put options on individual stocks.
As you might expect, Jones closely follows macroeconomic indicators as part of his investing strategy. And he doesn't like what he sees right now.
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Why a recession is probably coming
Jones appeared on CNBC's Squawk Box program on Tuesday, Oct. 10. Co-host Becky Quick expressed her view that the Federal Reserve has "lost control" over setting interest rates and that it's "going to be the bond market talking and setting rates." Jones agreed.
The billionaire hedge fund manager said that the bond market is likely to cause rates to increase more than they already have. He believes that there still isn't "a clearing price yet for long-term debt." The forces of supply and demand in the bond market, therefore, will push rates higher, in his opinion.
As a result, Jones predicted that "those rate hikes are probably going to tip us into recession." He thinks that the U.S. economy will likely enter a recession at some point during the first quarter of 2024.
What it could mean for stocks
The stock market usually falls before as well as during a recession. There are some exceptions historically, but an economic downturn isn't normally good for stocks.
^SPX data by YCharts. Gray areas represent U.S. recessions.
Jones doesn't think the stock market will respond well to the recession that he believes is on the way. He stated in the CNBC interview, "The stock market typically, right before a recession, declines about 12%. That's probably going to happen at some point, from some level."
Not everyone agrees with Jones' outlook. In recent months, Bank of America, JPMorgan Chase, and Federal Reserve Board economists retracted their previous forecasts that a near-term recession was likely.
Jones' track record in forecasting what the economy will do hasn't been perfect, either. In October 2022, he warned that the U.S. economy was near a recession or already in one. He proclaimed again in May 2023 that the U.S. could enter into a recession in the third quarter of 2023. Neither prediction came true.
What should investors do?
During the Squawk Box interview earlier this week, Jones also noted his concerns about the conflict between Israel and Hamas. He said, "It's a really challenging time to want to be an equity investor in U.S. stocks right now."
Jones stated that he prefers assets such as Bitcoin and gold rather than stocks in light of the economic and geopolitical uncertainty. He told CNBC's Andrew Ross Sorkin that there will probably be "$40 billion worth of buying that has to come into gold at some point between now and if that recession actually occurs."
But should investors follow Jones' lead in this case? What if he's wrong about a recession coming as he has been in the past? There are a couple of steps to take that could be prudent regardless of what happens.
One is to buy recession-resistant stocks that trade at a discount. If a recession does come, they should perform relatively well. Even if not, the stocks should perform well over the long term since they're already attractively valued.
You can get some ideas for stocks that check off these boxes from Jones' own Tudor Investment portfolio. For example, AbbVie (ABBV -4.58%) tends to hold up well during a recession or when the overall market declines. While the S&P 500 plunged nearly 20% last year, the big pharma stock jumped 19%. AbbVie is cheap right now, with its shares trading at a forward earnings multiple of only 13.6x. It also offers a great dividend, which yields nearly 4%.
Another strategy is to buy short-term U.S. Treasuries. It's what Warren Buffett has done recently with much of Berkshire Hathaway's available cash. Treasury bonds with maturities of one year or less currently offer yields of more than 5.35%. They're a safe place to park cash during potentially tumultuous times.
Because Treasuries have short-term maturities, your cash won't be tied down for too long. Stock market declines during recessions present fantastic buying opportunities for long-term investors. Even if Jones' prediction about a recession in early 2024 comes true, you can be prepared to take advantage by investing in great stocks on the pullback.
