According to Tressis chief economist Daniel Lacalle, markets are not pricing in a recession as stocks avoid a steep downturn.
“Markets are not pricing a recession at all. Stocks have risen way above earnings growth and macro, so markets are actually more likely to be discounting more easing, but definitely not a recession,” he said.
Calls for a full-blown correction intensified in recent months as the U.S. manufacturing sector entered into a recession due to a build up of surplus and the lack of progress in the trade talks with China.
Recession unlikely, improving sentiment around stocks
On Friday, stocks saw renewed demand as the U.S. unemployment rate dropped to a new historic low.
Optimistic data from the Bureau of Labor Statistics said Friday which showed the addition of 136,000 new jobs in September reversed the trend of stocks in the short term at a critical period.
Up until last month, as U.S. stocks struggled to sustain upside momentum, strategists like Gluskin Sheff’s David Rosenberg called for a recession to occur within the next year.
Despite the Fed’s accommodating stance towards a low benchmarkinterest rate, the strategist emphasized that the current trend of stocks is not sustainable over the medium term.
However, in a study, Oxford Economics lead economist Adam Slater found that apart from the yield curve, which historically has been an accurate predictor of a recession, six other major indicators including industrial output, corporate earnings, and stock prices need to light up to forecast a proper recession to occur.
As of late September, Slater noted that only the yield curve signalled for a further downside in the markets and as such, the economist said that it is too early to determine a recession to hit the U.S. market within the next 12 months.
The quick turnaround of stocks right before the weekend close alleviated significant pressure from the equities market that may crucially lessen recession talks heading into 2020.
It also has set a positive mood prior to the release of earnings from key sectors in October that may possibly fuel the momentum of stocks in the short term.
Fed has cover to keep rates low
Charlie Bilello, research director at Pension Partners, said that U.S. inflation expectations fell to September 2016 lows, a key piece of data that could allow the Fed to maintain low rates throughout the year’s end.
For most strategists with a bearish outlook on the U.S. equities market, the low benchmark interest rate has been the most important variable that may prevent a sudden economic nosedive as a result of mounting geopolitical risks.
If the low inflation rates provide the Fed with sufficient justification to maintain low rates until the first quarter of 2020, it is highly likely for discussions around a possible recession in the short term to drop as the markets begin to demonstrate signs of recovery.
Jerome Powell, the chairman of the Fed, also vowed to keep the U.S. economy in a good place, which may raise the confidence of investors on the outlook of the markets.