The signs are starting to add up that the United States is at the top of the economic cycle, and therefore headed down, likely into a bear market and recession, an increasing number of economists and money managers say. The main culprit for the looming downturn, they say, is the Federal Reserve, which is expected to again raise U.S. overnight interest rates on Wednesday.

Led by new Chair Jerome Powell, the Fed is slowly bringing interest rates up from zero, where they stood for around a decade, attempting to stabilize the economy and keep inflation from creeping higher. While few argue that interest rates should remain at zero forever, many are expecting the withdrawal of the liquidity cushion the U.S. central bank has provided for the economy to lead to some negative consequences.

“When the music stops I do think it’s going to be pretty ugly,” said Jonathan Beinner, chief investment officer of global fixed income at Goldman Sachs Asset Management.

Beinner highlights the increase of global debt, now upwards of $237 trillion and the way the debt has been dispersed as risks to the economy. Rather than banks holding most of the debt as it happened in the financial crisis, this time it’s hedge funds, private equity and investment managers holding most of it. Also worrisome, he says, ratings agencies are again being overly generous with their appraisals allowing for companies with very high debt levels to gain investment-grade ratings.

“We’ve sown the seeds for the next downturn and there’s a lot of similarities,” Beinner said, comparing today’s climate to what existed ahead of the global financial crisis in 2008.

“After ’08 everyone was like, ‘I can’t believe we did all those very stupid things.’ But we’re doing them all over again,” he said during a presentation at the Bloomberg Invest summit in New York last week.

‘It’s not different than 2000, not different than 2007’

The Fed has been pumping liquidity into the economy via its massive quantitative easing bond-buying program, which still holds around $4 trillion of debt. That’s about to be sucked out as the central bank raises interest rates and reduces its bond balance sheet, creating volatility, says Mark Yusko, chief executive and chief investment officer at Morgan Creek Capital Management. That will also weigh on risky assets like stocks that are already overbought, he added,.

“Liquidity drives markets and liquidity is shifting,” Yusko said at the Inside Smart Beta conference last week in New York. “We’re in a new liquidity cycle, we’re in a new liquidity regime and it’s going to be negative for risk assets and that is just what it is.”

Yusko also says that investor behavior is pointing to another downturn as buyers pile into popular stocks like Amazon.com (AMZN), the so-called FAANG stocks, and passive investment vehicles, looking to cash in on the market upswing.

“With all this money in cap-weighted indices, it’s not different than 2000, no different than 2007,” Yusko said.

Neither Yusko nor Beinner called for an immediate market turn, but say investors should be mindful of risk and hedging their bets, particularly in risky assets.

Going to cash

Yves Lamoureux, president of behavioral research firm Lamoureux&Co, however, says he’s reduced his U.S. equity exposure to about 10% of holdings. The Fed’s tightening cycle is the backdrop for the move, but his models are based largely on investor behavior, which show a buildup similar to January’s is growing in U.S. stocks. That led to a harsh February sell-off that battered markets and he’s anticipating a similar outcome.

“This is just a repeat of what we did in late January, i.e., go to cash,” Lamoureux said.

Other investors have expressed worry about the state of the economy given where the United States is in the business cycle and a number of economic indicators, including the U.S. Treasury yield curve. The difference between the yield on U.S. Treasury 2-year notes and 10-year notes recently plumbed to its lowest level since the 2008 financial crisis. Historically, a yield curve inversion — meaning 2-year notes pay bondholders more than 10-year notes — has forecasts a recession.

A yield curve inversion has predicted all nine U.S. recessions since 1955, with a lag time ranging from six months to two years. Fed officials have said they are mindful of the yield curve, but the central bank is expected to continue raising rates, at least twice this year and three times next year, according to its guidance.

Looking at the upside

But not everyone sees the economy in immediately dire straits or expects that a crash is on its way. Many investors say they remain bullish on the stock market, citing strong U.S. data prints and government spending on the horizon that should further stimulate the economy.

Jim Paulsen, chief investment strategist at the Leuthold Group, told Yahoo Finance he’s expecting the bull market to continue through the rest of this year. However, he does see a number of similarities to the 2000 dot-com bubble crash in the growth of technology stocks today.

“While the magnitude of the current tech-mania is far less than it was in 2000, the character of today’s stock market increasingly mirrors dot-com,” he said in an earlier note to clients called Dot-com Deja Vu.

However, Paulsen also issued a word of warning in an email to Yahoo Finance. “I still think yields will likely move higher this year and the stock market will remain under pressure.”

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Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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