The odds of a recession occurring during the next 12 months are nearly nonexistent as the U.S. economy is faring favorably as indicators point to a tight labor market with stagnant wage growth, signs that demonstrate stability.
The probability of a recession materializing is less than 10%, said Torsten Slok, chief international economist for Deutsche Bank Securities.
"The U.S. economy is in good shape and close to full capacity," he told TheStreet.
The fears of a recession occurring are unwarranted and the "risks of overheating are bigger than the risks of a recession," Slok said.
The Federal Reserve had indicated that three interest rate hikes could occur in 2017 and its nod to another increase "tells the markets that the risk of a recession is close to zero," he said.
A lack of economic indicators would trigger a recession for "at least the next year," said Deutsche Bank in a June 12 research note, which also factored in the policy stance of the Fed and the corporate bond risk premium.
"This compares favorably to the 14% of time the U.S. has been in a recession since 1970," the research note said.
The housing, consumer durables and capital expenditure sectors are not overextended, which are positive signs. Although the rate of auto purchases has declined, it does not pose a "significant" risk, Deutsche Bank said.
The unemployment rate is predicted to decline and fall below the 3% range during the next 18 months, and while inflation will rise, the odd of a recession through 2019 still remain nil.
While the economic recovery has been "unconventionally weak," the softer fundamentals do not pose a possibility of a "looming" recession, said Greg McBride, chief financial analyst for Bankrate, a New York-based financial data and content company.
"But we will inevitably get one, it is just a matter of when and what the catalyst will be," he said.
As the labor market continues to remain tight, wage growth "should pick up," but determining when that will occur is difficult, McBride said.
The latest GDP data has indicated that investment in structures and equipment has risen "substantially relative to the previous five years," said Edison Byzyka, chief investment officer of Hefty Wealth Partners in Auburn, Ind. GDP growth has been "highly relevant in its ability to foresee recessions and there's no indication of it now," he said.
Effect of Market Highs
The constant focus on the stock market reaching all-time highs again and again is nerve-wracking for some investors as the bull market is now in the late stages of an eight-year run.
"This is the bull market that nobody loved," McBride said. "When we get an inevitable correction, my concern is many would-be individual investors will use it as validation to stay on the sidelines instead of using it as an attractive entry point."
The highs in the market are not indicators of a looming recession and while interest rates remain moderately low, stock prices can "continue to advance and corporate profits continue to grow," said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.
One factor that stock market naysayers point to is that the S&P 500 currently trades at a "fairly rich" price-to-earnings (P/E) ratio of 25.7, he said. The benchmark index has sold historically at an average P/E ratio of 15.7.
Investors could opt to buy bonds, but the 10-year Treasury bond yield is a "paltry" 2.18%, said Johnson.
If that bond is kept until it matures, the investor will lock in that rate of return for the next ten years and "might well be hard pressed to keep up with inflation over that period," he said. "Worse yet, if interest rates rise and the investor sells the bond before it matures, the rate of return will be lower than 2.18%."
Stocks are not overpriced when P/E ratios on stocks are compared to yields on bonds - a P/E ratio of 25.7 equates to an earnings yield (E/P) on stocks of 3.9%, Johnson said.
"Suddenly, stocks don't look so overpriced," he said. "Perhaps the only thing more difficult than predicting the direction of the market is predicting the odds of a recession occurring. Often a recession occurs because of some black swan event, something that is wholly unexpected."
Whether the market is experiencing a cyclical or secular bull cycle, a pullback of 10% to 15% occurs frequently. Although a long stretch has occurred without the market experiencing one is only "slightly abnormal and different than other cycles," said Byzyka. Concentrating on it only characterizes a future of "imminent downside volatility, which is rarely the case," he said.
When a cyclical bear market occurs, retail investors need to be prepared to make decisions without emotional bias.
"Focusing on not worrying when the next bear market occurs is also key because chances are really good that they won't be able to time it," said Byzyka.
Markets are cyclical and each cycle is needed in order for the next one to follow, said Ron McCoy, a portfolio manager of the LOWS Fund with Covestor, the online investing company, and founder of Freedom Capital Advisors in Winter Garden, Fla.
"The timing of each cycle may vary depending on circumstances, but nature determines bear markets follow bull markets and this time is not different," he said.
The current GDP growth has remained below 2% and will grow weaker if the Fed continues to hike rate and withdraws quantitative easing, McCoy said. Wage growth will prove to be even more sluggish.
"This recovery was built on cheap money and if the Fed withdraws that money, it will create a drag to an already weak situation," he said.
Visit here for the latest business headlines.