Mario Gabelli is bracing for a 2nd-half recession, more banking fallout, and pressure on stocks and house prices. The billionaire investor told us why.

• Mario Gabelli expects a second-half recession and pressure on stocks and house prices.
• The billionaire investor says the banking fiasco could deter lending and cause other problems.
• Gabelli expects the Fed to continue raising interest rates in order to crush inflation.

US investors may face a recession later this year, pressure on stocks and house prices, and further fallout from the banking fiasco, Mario Gabelli told Insider in an interview on Tuesday.

"I see an economic slowdown in the second half of 2023, probably a recession," the billionaire investor and Gabelli Funds chief said.

However, Gabelli predicted it wouldn't be a severe downturn, as he expects federal infrastructure programs and government spending ahead of the presidential election next year to shore up demand. He also suggested that companies reshoring their operations, and countries such as China staging recoveries, could help offset the slowdown.

Recession fears have mounted as the Federal Reserve, in response to historic inflation, has raised interest rates from nearly zero to upwards of 4.75% in just over a year. Higher rates increase borrowing costs and encourage saving over spending, which can slow the pace of price increases. Yet they can also sap demand, pull down asset prices, and boost the risk of a recession.

"The Fed is unlikely to bend at the moment," Gabelli said. "They'll stay the course and raise rates."

The money manager flagged the fact that three banks — Silicon Valley Bank, Signature Bank, and Silvergate Bank — folded up last month. He warned the consequences of the debacle aren't yet clear.

"What are the ripple effects?" he asked, comparing the episode to a 7.5-magnitude earthquake. "What's the aftershock?"

Gabelli underscored the risk of a credit crunch, if customers keep shifting their deposits from smaller banks to bigger ones as well as money-market funds, and lenders pull back in fear of further bank runs. He noted tighter financing conditions could particularly affect housing and commercial real estate, as both sectors are heavily reliant on loans.

The veteran investor suggested that housing demand could cool for another reason: higher rates mean that taking out a mortgage today is much more expensive than it was two years ago. Moreover, he cautioned that the combination of a looming recession, stricter lending standards, rising rates, and pressure on house prices could weigh on stocks.

"I think there's no reason why the market should go up from here," he said.

However, stocks are likely to climb higher once the current economic headwinds fade, and the prevailing fear and uncertainty may present bargains for shrewd investors in the meantime, he said.

"These are the times we sharpen our pencils, read annual reports," Gabelli said.