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.