What If the Economy Keeps Going?

What if we don’t go into recession?

At times, it has seemed like all the talk over the last few months has been about recession. A June headline on CNN Business encapsulated much of the conventional wisdom we’ve seen in 2019: America’s CFOs are Bracing for a 2020 Recession. The story is based on the Duke University/CFO Global Business Outlook survey, which found that 48.1% of U.S. CFOs expect a recession by the middle of next year, and 69% expect a contraction by the end of the year. No question that estimates of global growth are trending down. The World Bank expects nominal growth to slow to less than 3%, down from about 6% in 2017 and 2018. Still, 3% growth is not a contraction.

So, what happens if the economy continues to muddle along or, unexpectedly, even sees a modest acceleration of growth?

While it may not be the consensus scenario, it’s at least worth considering as one possibility in a range of outcomes. The U.S. – China trade dispute has loomed large over global markets, dampening sentiment, raising trading costs, and threatening to trigger a recession. But we are entering an election year in the U.S. and no incumbent administration wants to see the economy contract during the run up to the vote. High level talks between the U.S. and China are now scheduled to take place this month (October) in Washington. It is very possible that there will be some sort of resolution to the current dispute and, if it happens, that may be sufficient to keep the expansion going. Should growth level out – or even accelerate modestly – we may well see a rotation in the sectors favored by the market. Commodities, including grains and metals, might see a pickup in prices, along with oil. Long term yields would reverse their year-long decline and begin to rise. Small cap stocks, which have lagged, would see accelerating earnings growth and, potentially, better relative returns. Europe, and especially its largest economy, Germany, has been especially vulnerable to disruptions in trade. A return to something like normalcy would likely support a restoration of growth there as well. It’s a truism that unprecedented events occur with some regularity, so it’s often useful to consider low probability outcomes if for no other reason than to be prepared. The current economic expansion is now the longest on record, so it’s not unreasonable to assume that we’re nearer the end than the beginning. On the other hand, the Great Recession that preceded it was itself a rare event, so we remain in uncharted territory when it comes to prognostications. For long-term investors, a strategic allocation to out of favor sectors may be worth a look. Related: What Impact Do Elections Have on Markets?