Recession solves 3 major stock market problems, plus we know when it will finally happen

DataTrek analyst Nicholas Colas says the recession could help solve three major problems plaguing stock markets: high inflation, aggressive interest rate hikes by the US Fed and falling productivity. Although rising interest rates and the credit crunch increase the risk of a recession, Colas says the markets welcome the economic downturn.

Who is Nicholas Colas?

Nicholas Colas is an American economist and co-founder of conversational finance startup DataTrek Research. He is also a correspondent for CNBC and Bloomberg TV.

He is considered an expert on stock markets, economics and the technology sector. Previously, Colas served as head of investment strategy at ConvergEx Group and Ladenburg Thalmann. He focused on market and sector analysis for institutional clients.

He said markets are currently viewing the possibility of a recession quite positively, as it could solve some of the serious problems currently weighing on stocks,according to DataTrek.

In its analysis on Friday, the firm warned of the growing risk of a recession within a quarter of a year due to rising interest rates as a result of the credit crunch stemming from the March bank failures. But despite those risks, the markets are rising, DataTrek co-founder Nicholas Colas said. A recession could fix the "three most pressing problems" in the markets caused by the pandemic, he said:

A. High inflation.

Prices hit a 41-year high this summer and remain well above the Fed's 2% inflation target. High inflation has hit corporate profits hard and caused stocks to fall 20% in 2022.

B. Aggressive interest rate hikes by the Fed.

Central bankers have raised interest rates from historic lows over the past year to control inflation. However, higher interest rates have raised the cost of repaying loans for companies and made bonds more attractive relative to stocks.

C. Declining productivity in the labor market.

The labor market has been extremely strong in recent years, and a recession could prevent firms from hiring new workers en masse, which would improve their profit margins.

"U.S. equity markets are not only anticipating an impending recession, but are actually welcoming the possibility of an economic downturn," Colas said.

He added that all three market problems have been quickly resolved in every recession since 1960.

"Markets see recession as a feature, not a bug. "Colas earlier said he believes the U.S. will not avoid a recession in 2023, which corresponds with other experts' warnings about the economy.

While Colas said the downturn will boost corporate profitability, other experts warn that a recession is likely to weigh on stocks in the short term. Stocks could fall at least 15% in the event of even a mild recession, JPMorgan predicted.

Please note that this is not financial advice.