Markets have been ignoring weak economic data recently and have rallied over the last week, according to a JP Morgan analyst.
He said in a note Wednesday that volatility in stocks and rates is easing because of low sensitivity to recession concerns.
The US economy has recently shown negative growth indicators, including a decline in housing data and a rise in weekly unemployment claims.
Weak economic data has not made a difference to risk markets. The reason for this is that investors are not exposed to the stock market much. The market can't be overlyreactive to downbeat data because of the lower equity positioning.
Market prices reflect the weakness in the economy. Recent earnings revisions show this.
The downward earnings revisions have advanced to a large extent, tracking the pattern of previous recessions, thus incorporating already significant earnings declines going forward. He said that the earnings decline have been anticipated.
In the event of a recession, a dovish Fed pivot should be easier to stomach, as market-based measures of inflation expectations have declined recently, according to JP Morgan.
"In response to economic weakness and declining inflation expectations, rate markets are already signaling a Fed policy reversal by pricing in an earlier Fed funds rate peak."
"We remain cautiously optimistic and continue to combine a sizeable equity overweight in our model portfolio with a credit overweight as a hedge."
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