The U.S. economy continues to grow robustly eight months after tax reform was implemented and a year and a half after President Trump began deregulating across several industries. The policies that the President has put into place have fired consumer and business confidence and could reap economic growth benefits for years to come, assuming that Democrats do not retake one or both houses of Congress in the midterm elections and begin rolling the policies back. A return to Obama era tax/spend/regulate policies would yank back from the business sector the freedom to invest and create value and wealth gained under Trump. It would likely to Trump wielding his veto pen to pernicious bills passed in Congress.
On Jerry Tuma’s Smart Money Radio program you’ve heard Jerry illustrating the benefits of these policy changes, but noting some factors (besides the election outcome) that portend a potential bear market in equities and recession thereafter.
The Double Indicator of Trouble Ahead
In its most recent report Bank Credit Analyst emphasizes two conditions that presage a sharp correction in stocks which could then be followed by recession: rising oil prices and rising interest rates. The report breaks down the situation for each this way.
Possible Oil Price Spikes
In the chart below BCA presents six scenarios for oil prices through 2019 and how they would affect two of the world’s price gauges: Brent Crude which comes from the North Sea, and West Texas Intermediate. The six scenarios chart the price path that BCA forecasts under various geopolitical caused disruptions.
Oil supplies have already been tight for some time and now the supplies from some of the world’s top producers are at risk due to political instability. U.S. sanctions against Iran are due to take full effect in November and BCA estimates it will take 1.4 million barrels of oil per day off the world market. Venezuela is in full political and societal meltdown and as Jerry has noted, the military has taken over running the country’s oil production.
Iraq and Libya are experiencing civil unrest. Islamic activists are destabilizing an already volatile Libya and threatening neighboring states.
U.S., Russian and Saudi officials have met to discuss these threats to the global oil supply. Prices currently hover at or above $60 per barrel and could continue rising past $80. The chart reflects BCA’s estimate for price under the different geopolitical outcomes and combinations. Prices would likely rise well over $80 and in a combination of political outcomes could spike above $120.
If Iran yield to the pressure that sanctions are putting on its already struggling economy, and like North Korea begins to cooperate on its rogue nuclear program, sanctions could lift and the severity of this scenario could soften. Trump the businessman know that carrot and stick negotiating tactics yield results.
Fed Continues to Tighten Rates
The U.S. economy is humming along at growth rates the Obama Administration could only dream of and for which President Obama recently tried to claim credit in a speech. Unemployment is below 4 percent and labor costs are rising.
The Fed fears rising inflation and plans to soak up much of the liquidity that was pumped into the economy in the 2008 economic debacle. The Fed has instituted a series of interest rate hikes, with the next one coming at the end of this month and another in December. As Jerry has often cited, the Fed always attempts a so-called soft landing for an economy showing signs of inflation, but rarely accomplishes it. More often the landing is more jolting to the markets and the economy.
Put the Two Together
BCA notes that rising oil prices preceded ten of the last eleven recessions. Put together with rising interest rates and a recession typically follows within six to eighteen months if oil rises more than 50 percent and interest rates by more than 200 basis points.
Cornerstone is Preparing for Its Clients
Jerry has noted on his radio program recently Cornerstone Financial Services has begun to move clients’ money to prepare for these possible market and economic conditions ahead.
Contact our offices for a complimentary portfolio analysis.
Listen to the latest edition of Jerry Tuma’s Smart Money Radio to stay on top of the latest analysis of the economy and the markets.