A recession may be coming, but markets aren't worried because a downturn would solve 3 big problems weighing on stocks

• A recession could be coming, but markets don't appear to be that worried. 
• That's because a downturn could resolve three big issues that have weighed on stock market. 
• "Markets see a recession as a 'feature, not a bug,'" DataTrek's Nicholas Colas said.

Markets are behaving as if they're unfazed by the risk a recession could be on the horizon, and that's because a downturn would potentially solve a handful problems that are weighing on stocks, according to DataTrek.

In a note on Friday, the research firm pointed to the growing risk of recession over the past year amid higher interest rates and a credit crunch stemming from March's bank failures. 

But markets have been buoyant in the face of those risks, DataTrek co-founder Nicholas Colas said, and a recession could remedy the "three most intractable problems" in markets that were spawned by the pandemic: 

1. High inflation. Prices notched a 41-year-record in mid-2022, and still remain well-above the Fed's 2% inflation target – a factor that weighed heavily on corporate earnings and caused stocks to slump 20% in 2022.
2. Aggressive Fed rate hikes. Central bankers raised interest rates from historic lows over the last year to control inflation, which has squeezed firms with a higher borrowing costs and made bonds more attractive relative to equities.
3. Falling productivity in the labor market. The labor market has been incredibly robust in recent years, and a recession could stop companies from hoarding workers, which will improve profit margins.

"US equity markets are not just looking past an upcoming recession but actually embracing the possibility of an economic contraction," Colas said, adding that all three issues in the market have been resolved quickly with every recession since 1960.

"Markets see a recession as a 'feature,' not a bug.'"

Colas previously told Insider that he didn't see the US avoiding a recession in 2023, in line with what other experts have warned for the economy. 

Though Colas said a downturn would strengthen the earnings power of firms, commentators have warned a recession is likely to weigh on stocks in the near-term. Equities could tumble by at least 15% in the event of even a mild recession, JPMorgan forecasted.

More bearish market voices, like legendary investor Jeremy Grantham, have predicted as much as a 50% crash in stocks as the bubble in asset prices bursts.