My expectation is U.S. and global growth will be sustained through fiscal, monetary, trade, and regulatory policy for one-and-a-half to six years into the future before the next significant recession emerges. Market risk managers should consider that the next recession could emerge as early as the first half of 2020 or as late as 2023 or 2024.
I fall into the camp that the next major U.S. and global economic downturn will arrive sometime during or after 2023. That said, since no one has a crystal ball, planning for the unexpected is critical. No matter the exact timing of the next recession, I expect the following market events to unfold.
- I expect interest rates to show more strength than weakness into the next recession;
- I expect U.S. and global equity markets to be sideways to up, with normal corrective periods like most U.S. and global equity markets are currently experiencing, to remove excess valuations;
- Toward the end of the business cycle, I expect strong performance in the commodity sector.
I always assume I have misjudged the outcome of any one of several policy actions impact on ongoing market dynamics. Why? Many U.S. and global government and central bank policy actions are being implemented in a U.S. and global economic setting, where market impacts are less than certain.
Business Cycle Duration. Currently, the United States is in the second longest business expansion in history, due to ongoing policy intervention activities. This makes all money managers and market participants extremely anxious to an unexpected economic downturn triggering significant U.S. and global market equity and commodity weakness. Most memorable economic downturns are unexpected for several reasons.
Surviving Extended Business Cycles. One challenge U.S. and global governments and central banks face with engineering domestic or global growth through their individual or collective policy actions is management of asset inflation or asset bubbles. Why? Business cycle expansion fueled by stimulus driven growth tends to be more easily achievable or politically popular, but orderly business cycle contraction needed to manage asset inflation or asset bubbles tends to be a sloppy and scary process and lacking in political popularity. Consider the current price weakness in many global equity and commodity markets.
Therefore, expect periods when U.S. and global growth will be stimulative-driven and periods when U.S. and global governments and central banks will attempt to allow market excesses to be drained from the market. If you look at the accompanying slide show, you will note the current presence of price weakness in many of the world’s equity markets, which is positive for many markets if one or more do not cascade to the downside. Many of our commodity markets are dangerously weak.
Market expectations over the next several weeks.
- U.S. 10-Year Treasury. Yield Sideways to Down - As U.S. and global equity markets continue correcting upside gains, the demand for U.S. 10-Year Treasuries are likely to pull the yield slightly lower. Beyond this, ongoing global equity corrective process yield will regain upside momentum. (October 26, 2018 – 3.08) (Range 3.01 to 3.23) Charts (A1-A4)
- U.S. Dollar. Sideways to Down - The U.S. Dollar moves sideways to down, correcting some upside gains against the Euro over the next few weeks. Beyond the expected near-term correction, dollar strength could be a major headwind for U.S. exports into the middle of next year. (October 26, 2018 – 96.13) (Possible Upside 110) Charts (A5-A13)
- U.S. Equities. Sideways to Down - Most U.S. equity markets likely need to finish correcting upside gains before moving higher. Several policy factors will determine near-term price strength or weakness in U.S. equity markets. It would be desirable for price excess to be removed from these markets before moving higher. Possible rally into year-end. Charts (A14-A18)
- Global Equities. Sideways to Down – Near-term, ongoing policy discussions between the U.S. and its economic and trading partners, is likely to limit upside potential of many of these markets. The Global Equity Index (EFA), Emerging Markets (EEM), and Frontier Markets (FM) move mostly sideways to down over the next several weeks. The strongest and most stable index will likely be the global index, followed by the emerging market index, and the frontier index will likely be the weakest index over the next several weeks. Possible rally into year-end. Charts (A19-A29)
- $WTIC Oil. Sideways - $WTIC oil prices have potential downside weakness to the $65 per barrel area. This market soon will likely be more bullish than bearish. A $WTIC October closing price below $67.15 would cause me to start considering downside price action to $58. (October 26, 2018 - $67.59), Charts (B6-B9)
- Soybeans. Sideways, Retest Lows, Define Trading Range - Soybeans (October 26, 2018 - $8.58 per bushel) to date have not overcome heavy resistance. Potential global money flows leaving global equity markets do not appear to be a catalyst for providing additional near-term soybean price lift. Until soybean prices hold above $9.00 per bushel, I remain more concerned about the downside to $8.12 or lower than the upside. Charts (B10-B13)
- Corn. Neutral to Bearish - This market does not need to end the week of October 29, 2018 below $3.64 per bushel. Ending the week below $3.64 per bushel suggests potential downside to $3.23 per bushel. (October 26, 2018 - $3.68 per bushel). Charts (B14-B17)
- Wheat. Neutral to Bearish - Wheat is simply moving sideways with a downside bias. If wheat ends the week of October 22, 2018 below $5.00 per bushel, wheat likely has serious weakness. (October 26, 2018 - $5.05) (B14-B17)
- Long Grain Rice. Neutral – January rice holding above $10.28 per cwt. would be positive for potential additional upside price strength. That said, fundamentals continue to weigh heavily on this market without significant new business. (Chart B18-B20)
- Cotton. Potentially Bullish, Global Deflation Forces Weighing Heavy Cotton Prices - Key consideration: If cotton can finish the week of October 29, 2018 above December 77.86 cents per pound, this market has potential to regain upside price momentum, given today’s global economic setting. Finishing the week of October 29, 2018 below 77.86 cents per pound would likely indicate additional price weakness lies ahead (October 26 – 78.53-cents per pound). Charts (B21-B24)
- Livestock. Price Trend Bullish - Lean Hogs, Feeder Cattle and Live Cattle remain bullish.
- Gold and Silver. Neutral to Bearish - Gold and silver could find some near-term price support especially if the dollar continues to correct its upside move.
2018 Arkansas Rice Cultivar Testing “Preliminary” Yield Reports, Jarrod Hardke - Rice Extension Agronomist, final results will be posted in early December.
Dr. Thomson on New Technologies for Rice Breeding with a Focus on CRISPR Gene Editing, Dr. Michael Thomson, Texas A&M AgriLife Research, Link to register: http://bit.ly/UAEX-Rice-Breeding-CRISPR-Thomson. This webinar will provide an overview of molecular breeding technologies for rice improvement, including next-generation sequencing, marker-assisted breeding, and an in-depth focus on gene editing using CRISPR-Cas technology.
Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, University of Arkansas System, Division of Agriculture, Cooperative Extension Service. E-mail: [email protected]
Download Slide Show for charts and expanded details, Click Download Link