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.