Anyone following the ins and outs (mostly outs) of the U.S. economy is painfully aware that the odds of a Recession are moving up. But to what extent are stocks in the United States and elsewhere pricing in a recession?

The S&P 500 entered Official correction territory at the start of the week, registering a loss of 10.1% from its peak in October. Since then, it has regained a few percentage points, paring its loss to just 6.3% as of yesterday -- which is hardly in the realm of a typical recession-led retreat, which averages about 23%.

Similarly, other major equity markets in the world are also shrugging off the possibility of a recession, even though it is still unclear whether the world can Continue to party even as the U.S. economy assumes the fetal position on the couch.

According to David Rosenberg, North American Economist at Merrill Lynch, the odds of a recession are now 60%, up from a recent Estimate of 50%, using a Proprietary model that takes into Account the yield curve. Trouble is, he believes the U.S. stock market as a whole has priced-in just a 37% chance of a Recession, leaving room for further downturns if the economy continues to decline.

"Other metrics we look at suggest that the risk [of a Recession] could be even higher, but even at 60%, very few asset classes or equity sectors are priced for that risk," Mr. Rosenberg said in a note to clients.

He looked at the current peak-to-trough Performance of a number of asset classes and sectors, and then compared them to average peak-to-trough performance around recessions.

He found that commodities were virtually ignoring the chance of a recession, with just a 10% chance priced in. On the other hand, suffering small-cap stocks have priced in a 61% chance.

In terms of sectors, he found that industrials, tech, materials and energy have more discounting to do, given that recessions tend to drive everything down.

"As for the traditional Defensives, it would seem as though telecom has priced in more recession risk than health care or staples," he said.

Meanwhile, U.S. banks, which typically fall about 30% during a recession, are way ahead of the game because they have fallen 26% already. If a recession strikes, these stocks are 86% of the way there, Leaving little downside risk.

As for other markets, Including Canada, economists and strategists are debating whether they will be swept up in a U.S. downturn or exhibit a newfound ability to "de-couple" from U.S. influence thanks to surging domestic consumption.

Charles Burbeck, head of global equities at HSBC, noted that China is now less Dependent on exports to the United States, meaning that it should remain relatively unscathed. In 2001, U.S.-bound exports accounted for about 11% of the total; today, the number is closer to 8%. As for the rest of Asia, U.S.-bound exports have fallen from 7% of the total in 2001 to just 4% today. Exports are not declining; domestic growth is picking up.

Will Canada follow China or the United States? Right now, the equity market is signalling that it will follow China, meaning that the Economy will hold up. But if that changes, equities will have a whole lot of catching up to do to price in a recession.

Dberman@nationalpost.com

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