'Recessions always start with an economy that's been booming': An investing pioneer explains why he sees 50% chance of a downturn in 2024

• Investing pioneer Rob Arnott said there's a 50-50 chance of a recession in the coming year.
• Many people think recessions don't begin with a booming economy, but the opposite is true, he told CNBC.

The US economy just saw its strongest quarter of growth since 2021, but to investing pioneer Rob Arnott that doesn't mean the upbeat news will continue into the new year.

While more Wall Street analysts have shifted their views toward no recession in the near term, the founder of Research Affiliates and "godfather of smart beta" investing is less sanguine.

"People will say that recessions don't start with a booming economy," Arnott told CNBC Thursday. "That's not true. Recessions always start with an economy that's been booming. It's the nature of the peak and the rolling over."

Bloomberg's latest poll showed forecasters give about 55% odds for a recession in the next 12 months.

The recent bond market volatility suggests reason for caution, in Arnott's view, even though the stock market appears to be shrugging it off so far.

"In any given year, the normal risk of recession or bear market is about 20%," he added. "I'd say for the coming year it's about 50-50."

When asked if his forecast means investors should buy bonds, he replied no, though he acknowledged that bonds are much more attractive than they were when yields were lower. Meanwhile, US growth stocks are vulnerable, he warned.

"There's a couple of headwinds that play against growth and in favor of value," Arnott said. "One of those is relative valuation. When the spread in valuation between growth and value gets enormously wide, any mean reversion will work in your benefit if you're a value investor."

He said persistent inflation supports the case for value stocks rather than growth stocks, since they provide a greater margin of safety.

Elevated inflation, too, sustains higher bond yields, which suggests a higher discount rate for long-term future growth, and ultimately "reduces the value of growth stocks relative to value stocks."