Well, well, well, listen up folks! The big boss, Nicholas Colas, has spoken and apparently an economic downturn could actually help us out. Yes, you heard that right – it could take care of three pesky problems that are holding back growth – declining productivity, high inflation, and the Feds raising interest rates like it’s their full-time job. In his daily market note, Colas wrote that “every recession since 1960 has caused all three issues to reverse course, and quickly.” So, I guess we should thank the recession for being a “feature, not a bug,” for once.

Hey, hey, hold on a minute! Did you hear the news from Wall Street? Apparently, the bigwigs are expecting a recession to hit us later this year. What a shocker! The reasons for this include the Fed’s rate hikes, which are aimed at keeping a tab on inflation, along with the credit crunch that is expected from the banking drama that went down in early March. Even the Fed’s own economists had something to say about this at their March meeting – they also predict a mild recession. Seems like everyone’s getting ready to hunker down.

But wait, there’s more! Despite all these gloomy predictions, the markets seem to be holding up well. The S&P 500 is up over 7% in 2023 (woohoo) and the CBOE Volatility Index has just hit its lowest level since 2021. Go figure! If a recession is in the cards, the markets believe that it will be short and sweet, with a bouncy recovery on the other side. Ah, markets – you never fail to keep us on our toes.

So, digging deeper, our dear Colas has some good news to share. Apparently, history is on our side. See, during a recession, businesses usually start cutting the fat and focusing on efficiency, which accelerates labor force productivity. This leads to a boost in output and earnings, and voila! Stocks bottom before the US economy hits rock bottom – the markets just get this dynamic, okay? Second, the Fed usually cuts interest rates in the wake of a recession. But hey, the markets and the central bankers are not exactly on the same page when it comes to the direction of rates this year. While both parties see a final hike in May, the traders expect the Feds to start cutting rates by the end of the year in response to the recession. But remember, policymakers have also stressed the importance of fighting inflation through tight monetary policy. Confused yet? Well, our buddy Colas says that the markets know all these historic shenanigans, and they see the impending recession as a signal for the Fed to start the next easing cycle. And guess what? The Federal Reserve is also well-aware of this. So, hooray for everyone being on the same page!

Finally, we get to the cherry on top (or rather, the cherry that’s going to come crashing down). A recession is going to dampen demand, and you know what that means? Our nemesis, inflation that is still running ahead of the Fed’s 2% goal, will take a hit and come down. Boom! As all these dynamics work together, a recession is our knight in shining armor – it would bring down prices while improving labor force productivity. Sure, there are other pathways to achieve these goals, but nothing works as swiftly as an economic contraction. So, that’s why the markets love this – it’s a “feature, not a bug” in their eyes. You gotta love these folks for their eternal optimism!

Serious News: cnbc