Several timeline issues may affect the 2019 economic and market outlook, but dispute outcomes will likely change those positions and the accompanying timelines. The more contentious the policy dispute in negotiations, the more extended the timeline and the greater the market uncertainty.
Market outlook 3 to 6 months
- U.S. Dollar—Sideways with upside bias
- U.S. 10-Year Treasury—Yield or interest rate sideways, low in yield potentially close at hand.
- U.S. Equities—High volatility, sideways downside bias, searching for a low, low possibly two to five months out.
- Emerging and Frontier Markets—U.S. dollar strength places a drag on emerging markets, high volatility, downside bias, searching for a low, which could also be two to five months out.
- $WTIC Oil—Sideways in search of a bottom, potentially below $40 per barrel, but, probably starting no later than the second half of 2019, we will likely see building demand and stronger prices.
- Rice, grains and cotton— Global policy disputes, slowing global growth and fundamentals weigh heavily on these market prices, while weather uncertainties provide hope for supportive prices.
- Livestock—Potentially more bullish than bearish.
2019 Wildcard Uncertainties
Timeline for policy dispute outcomes is unknown with China at the top of the list. Also, national security concerns are building, especially with China, Russia, North Korea, Middle East, etc. Europe and European Union economic and political outcomes are unknown.
The potential negative impact of weather events on food and fiber production appears to be building.
The timing of global governmental and central bank stimualtive activities is less than certain and is a much bigger unknown than most appreciate; for example, China may not significantly throttle up stimulus until 2020.
Uncertainty influences market misdirection. Especially for the next three to six months, most currencies, bond, equity and commodity markets will be in a misdirection mode with seemingly no defined direction, due to economic uncertainties and policy disputes, so markets are likely to thrash around and form complex ranges and technical patterns.
The Market will simply do what it does exceedingly well in normal times, as well as in periods of major global economic uncertainty and policy disputes, which is to punish herd mentality.
What do most global leaders agree upon?
Global leaders agree on the maintenance of “synchronized global growth.” Why? The global economy in the aggregate is far too debt burdened to manage a recession without potentially slipping into a deep recession or worse.
Global leaders also agree that if they are going to maintain economic momentum at a defined level and extend and/or manage individual, regional and global business cycles, they need to manage the level of synchronized global growth through periodic synchronized global slowdowns to deflate artificial asset bubbles and realign currency, bond, equity and commodity markets globally.
Global governments and central banks do an interesting job through fiscal, monetary, trade and regulatory policies of managing, supporting and maintaining economic momentum of their individual, regional and the collective world economies.
Most analysts, including myself, underestimate U.S. and global governments’ and central banks’ impact on economic and market activity or their ability to extend a problem into the future without any real resolution of the problem. At some point, the market will reset in a major way, but that is likely in the distant future.
Policy Dispute Challenges.
China. Chinese leadership remains adamant about achieving goals of technical supremacy by 2025, financial supremacy by 2035, and military supremacy by 2047. Some suggest China may already have technological supremacy. Any country or business with technological supremacy over their competitors can outperform all. Understand, China is increasingly limiting U.S. influence with Asian, African, and South American countries for varying reasons.
Russia. Russia is an opportunistic predator and would contend that history justifies their actions. Russia’s military is leaning into Eastern Europe as well as making their presence known in the Middle East. Russia’s policy interests are certainly aligned with China.
Europe. Europe has serious economic problems, which is cultivating populist movements and creating rising political uncertainty. Can Europe avoid a recession in 2019? They can, but uncertain if they will.
Turkey, Iran and Saudi Arabia. Leadership of these three countries, I suspect, have self-preservation at the top of their to-do-list, which means they are individually highly territorial and expansionary as opportunity presents itself. This is highly problematic for their neighboring countries and the United States.
North Korea. North Korea remains an unpredictable and dangerous adversary.
Japan. All major global leaders are watching the Japanese experiment of monetizing their sovereign debt. This is important because all countries at some point will have to implement some form of this practice.
India. India does not carry the debt burden of most major world economies, which is a positive for their future growth. Also, India is a fascinating experiment in moving toward a cashless society, which global governments are watching with great interest. Cashless societies allow for an expanded tax base, increased intrusion into the lives of their citizens and limitations on the potential bank runs in times of depression.
President Trump, Congress, and U.S. Central Bank.
All have their responsibilities, which we discussed in yesterday’s article. Make no mistake, the ongoing policy disputes, coupled with global market realignment, will have a significant impact on 2019 global growth and economic and market dynamics. The good news: a recession is not likely this year and probably not next year. The 2019 market challenge is to weather market volatility, define the complex trading ranges and patterns and not run with the herd.
No Crystal Ball
Since no one has a crystal ball, always consult an investment professional or professionals before making investment decisions.