The odds of a recession in the next year are rising. Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley, lays out three reasons to heed the warning signs, and how investors can prepare.

Inflation persists

“Inflation is now broadening out, with the potential to stay higher for longer – historically, a scenario that keeps the Fed in policy-tightening mode. This likely portends additional rate hikes of a half-percentage point combined with aggressive balance-sheet reduction.”

Price pressures may lead to “demand destruction” 

“Higher prices will eventually cause consumers to forgo purchases they would have otherwise made. We just cut our full-year GDP growth estimate by a full percentage point to 2.6%.”

Commodity and currency-market volatility complicates the global growth outlook

“With commodity prices still relatively high, business and financial conditions are improving for emerging markets (EM) exporters while worsening for importers. These dynamics are exacerbated by a simultaneous strengthening of the US dollar, which causes a squeeze for countries and businesses heavily leveraged to dollar-denominated debt. Shockwaves from these imbalances are increasingly reaching the broader credit market, with spreads on high-yield bonds, mortgage-backed securities and EM debt now widening – generally indicating risk aversion.”