US Recession Risk At Its Highest In 40 Years: Why Is The Stock Market Ignoring The Economy?

The New York Fed's U.S. recession probability index based on Treasury spreads is currently sitting at its highest level in more than 40 years, even higher than its peaks prior to the bursting of the dot com bubble and the 2008 global financial crisis.

Economic indicators suggest a recession may be just around the corner, but you certainly wouldn't know it by looking at the stock market's performance so far in 2023.

Fed Pivot: The SPDR S&P 500 ETF Trust SPY is up 6.9% year-to-date despite ongoing concerns over persistently high inflation, a tight labor market and rising interest rates. DataTrek Research co-founder Nicholas Colas recently tried to make sense of the fact that Wall Street and the Federal Reserve seem to be on two completely different pages when it comes to the outlook for the U.S. economy.

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Colas said investors may be anticipating economic conditions and Fed behavior will change very quickly in 2023.

"It’s not that they are in denial about the possibility of an economic downturn. Rather, they are anticipating a shift in monetary policy because of the recession the model is so clearly predicting," Colas said.

Related Link: 3 Reasons The 2023 Stock Market Rally May Be 'Another Bull Trap'

The bond market is currently pricing in three more 0.25% interest rate hikes in March, May and June. However, the Fed may be forced to pivot from tightening to loosening monetary policy sooner than expected if the U.S. economy falls into a recession quickly.

Benzinga's Take: Economic data is real-time or even lagging, while the stock market is forward-looking. The S&P 500 may have already priced in a 2023 recession in 2022, and its 2023 resiliency is from investors looking beyond the coming recession to another period of economic growth and low-interest rates.