Many investors fear a recession is around the corner. How to protect and profit if one hits

Published Fri, Mar 25 20221:25 PM EDTUpdated Fri, Mar 25 20222:37 PM EDT

A score of big money investors such as Carl Icahn, Jeffrey Gundlach and more fear that a U.S. recession is on the horizon. How can you protect your portfolio if it is? The recession fear has grown since the Federal Reserve announced its first rate hike in more than three years and signaled that consistent increases were on the way until it can stamp out a 40-year high in inflation. Combine that with surging gasoline prices, a flattening of the so-called yield curve and a war in Europe, and investors and economists are starting to increasingly believe an economic downturn could be near. "As they tighten monetary policy, that's the fodder for recession," said Mark Zandi, chief economist at Moody's Analytics. "They can make a mistake and step on the brakes too hard and push the economy into a recession." Despite a two-week bounce, the S & P 500 is headed for its first negative year since 2018 on the concern, down 5% on the year. Economists at major banks still see chances of a recession at generally less than 33%, but have been increasing those odds lately. "The Russia/Ukraine conflict, commodity price spikes, inflation concerns, and a very uncertain Fed outlook have caused recession fears to rapidly intensify and equity markets to sell off sharply," wrote Wolfe Research's Chris Senyek this month. When will a recession hit? The "Bond King" Gundlach speculates a recession could come as early next year. "I don't have a base case of a recession this year, but I do think that we'll probably get one in 2023," he said during an interview with CNBC's " Closing Bell: Overtime " this month. Meanwhile, Satori Fund's Dan Niles told CNBC's "Street Signs Asia" there are "very strong indicators" pointing to a recession within the next year, and the likelihood is "very high" because the Fed prolonged its response. Famed investor Icahn is prepping his portfolio for a likely recession by continuing to bet against malls — a position he held before the pandemic began . "I think there very well could be a recession or even worse," he told CNBC's "Closing Bell: Overtime" this week. "I have kept everything hedged for the last few years. We have a strong hedge on against the long positions that we try to be activist in and get that edge ... I am negative as you can hear. Short term I don't even predict." The possibility of an inverted yield curve is perhaps one of the strongest indicators spooking investors and economists. An inversion happens when short-term rates on Treasuries climb higher than longer-term rates and generally signals that investors have less confidence in the future and see an economic slowdown. The spread between long-term rates and short-term rates has been narrowing. How to cushion a portfolio As a recession becomes an increasing possibility, investors are highlighting ways to protect portfolios from taking a massive hit. Everyone generally loses some money during a recession, but they point to areas of the market with minimal economic sensitivity — such as noncyclical business sectors such as utilities, health care and consumer nondurables — that can remain stable and generate some income for investors. Dividends are a forgotten strong contributor to overall returns, according to Peter Boockvar, chief investment officer of Bleakley Advisory Group. He highlights companies such as Procter & Gamble , as well as Kellogg , Coca-Cola and General Mills — three stocks his firm is long on. Amid the ongoing war in Ukraine, the defense sector is another bright spot along with energy services, said Rosenberg Research founder David Rosenberg. He highlights green energy, which could accelerate as the crisis continues to illustrate the global reliance on fossil fuels. The iShares U.S. Aerospace & Defense ETF just hit a two-year high on Friday and is up 9% this year. Meanwhile, Niles says the Satori Fund is eying companies producing good earnings, cash flow and low valuations, he told "Street Signs Asia." Nothing will "ride out a 20% plus correction in the stock market," but the fund is using short positions to "hopefully cushion the blow," Niles said. Networking stocks such as Cisco , cruise lines and hotels, and companies such as Nokia as investments ramp up in 5G are among the names that can withstand the volatility, he believes. "The way it works is we generally are running with almost as many shorts as we have longs on the portfolio. And so that's how we're trying to match things up. When the market gets oversold, we cover the shorts, our cash levels go up, let the market rally," Niles explained. "As the market rallies, we start putting some shorts." Look for 'safe havens' Commodities have soared lately as the conflict between Russia and Ukraine continues, but precious metals like gold and silver generally fare better than industrials during a recession. "Gold is a good performer because it's a storer of value," explains Sam Stovall, chief investment strategist at CFRA Research. "If people don't know how deep the recession is going to be, how far down the market is likely to fall, they're going to put their money into safe havens." Spot gold is already on a winning streak and briefly topped $2,000 per ounce this month, hitting a record high since 2020. Boockvar says he's a big bull on gold and silver. Boockvar thinks investors should also reconsider cash. "There's no better time to be buying stocks than in a bear market and a sharp decline, but you need cash to do that," he said. "People should not be shy about holding cash in this environment. Even in real terms, you're losing money relative to inflation, but you're not losing anything in nominal terms." While the notion of a recession is becoming more common, not all economists are convinced one is looming. Evercore ISI's Ed Hyman made a case for an "unlikely" recession in 2023. A "much higher fed funds rate is unlikely to cause a recession until the 10yr-3mo yield curve inverts," plus, an inversion generally precedes a recession by about a year, he said. Bank of America said Friday risks of a recession are low, but the odds may increase in the second half of 2023. Meanwhile, Rosenberg expects a recession as early as the third quarter. "I'm not going to say that it's a 100% chance we get a recession, but I'd say the odds speak for themselves," he said. — CNBC's Michael Bloom, Yun Li and Eustance Huang contributed reporting

People walk past office buildings in midtown Manhattan, New York.

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A score of big money investors such as Carl Icahn, Jeffrey Gundlach and more fear that a U.S. recession is on the horizon.

How can you protect your portfolio if it is?