A strategist says a recession is coming – and stock markets may be in for some pain

The latest US economic data suggests a recession is coming, according to the CEO of financial advisory firm Longview Economics, and investors may need to prepare for some pain in the stock market.

Speaking to CNBC’s “Squawk Box Europe” on Friday, Chris Watling said he believes a recession is on its way, citing what he called “very convincing” and “very bad” leading economic indicators.

Conference Board on Thursday He said Its leading economic indicator of the US fell 1.2% in March, falling to its lowest level since November 2020. The data seemed to indicate that economic weakness may soon intensify and spread across the US economy.

Besides that warning signal, Watling said the typical timeline for a recession after a Treasury yield curve inverted, first inverting in March 2022, and then again in the following months, is roughly a year or so.

“Every time that happens in the United States, you have a recession. So, I think it’s coming, it’s on its way. It’s just a matter of timing,” Watling said.

While many economists have warned of a looming recession, the International Monetary Fund just last week indicated that it was surprised by the recent strength of the US labor market and consumer spending.

On April 11, the International Monetary Fund released its latest World Economic Outlook, in which it said it sees the world’s largest economy expanding 1.6% this year, up from its forecast of 1% in 2022.

Gita Gopinath, the IMF’s first deputy managing director, told CNBC’s Jumana Persic last week that signs of slowing inflation data gave the fund reason to believe the US economy could avoid a recession. She added that the so-called hard landing was still “within the realm of possibility.”

Asked on Friday whether stock markets could go through an expected recession relatively unscathed, Watling replied: “I mean they wouldn’t go through unscathed in our view. I’m not relatively sure.”

“The reality is if you look at profit margins, they are at record levels in 2021 and a little bit into 2022 and of course when you have a good bit of inflation you can get very good operating leverage so you can have record high profit margins,” he said. Watling.

“When you go into a recession, we have to do a double whammy on profit margins. And you have to normalize them back to normal levels, and then you have to price them into a recession. So I think the earnings outlook is overly optimistic, and so the stock market is going to have to deal with However, at some point.”

— CNBC’s Karen Gilchrist contributed to this report.