Why Bill Gross expects a U.S. recession to begin by year’s end

“Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly. Recession in 4th quarter,” Gross said.

Such an outcome would represent a remarkable turnaround, considering the Atlanta Federal Reserve’s GDP Now real-time indicator shows the U.S. economy expanding at a 5.4% annualized clip during the third quarter. Official GDP data is due Thursday, with economists polled by The Wall Street Journal looking, on average, for a 4.5% annualized growth figure.

Many Wall Street economists had anticipated that the U.S. recession would slide into recession earlier this year. However, strength in construction, consumer spending and other areas has helped it defy expectations, as data show it has instead continued to expand at a solid pace.

Revised data released last month by the Commerce Department showed the U.S. economy grew by 2.1% during the second quarter. Typically, investors only become aware of recessions in hindsight after they’ve been officially declared by the National Bureau of Economic Research.

Rising auto-loan delinquencies are an alarming portent of economic pain to come, Gross said, citing data from Fitch Ratings, reported by Bloomberg News on Friday, which showed the percentage of subprime auto loans more than 60 days delinquent surpassed 6% in September. At 6.1%, it’s the highest rate ever recorded by the data series going back to 1994.

As far as how investors might play this, Gross said he’s “seriously considering” investing in shares of regional banks, which have fallen substantially this year: the SPDR S&P Regional Banking ETF
KRE,
one popular exchange-traded fund tracking regional players down more than 30% year-to-date. He also touted some merger-arbitrage plays, a strategy he endorsed in a recent investment outlook.

He also recommended betting that the Treasury curve will continue steepening as it looks to break out of negative territory for the first time in more than a year. Rising long-term rates have nearly caught up with short term rates, with the 10-year yield
BX:TMUBMUSD10Y
within 30 basis points of the 2-year yield
BX:TMUBMUSD02Y
on Monday.

10-year yields have been lower than 2-year yields for 327 days, according to Dow Jones Market Data. That’s the longest stretch since the 444-trading day streak that ended May 1, 1980.

Gross is using interest-rate futures for his steepening trade. He expects the curve will re-enter positive territory before the end of the year as a slowing economy forces investors to adjust their expectations regarding the timing of Federal Reserve interest-rate cuts.

“’Higher for longer’ is yesterday’s mantra,” Gross said.

Following a decadeslong career on Wall Street, Gross announced his retirement a few years back after a stint at Janus Capital Group. He joined Janus after a contentious exit from Pimco.

Nevertheless, Gross has continued to share his views on markets in posts on X, as well as in investing outlook letters published to his website, and during interviews with the financial press.