No doubt, 2018 is ending with an economic thud.
Fear that the next recession is around the corner hasbeen knocking down stock prices and our 401(k) plans:If you've beenwatching the stock market slump in the final quarter of 2018, you know it’s been a dreary stretch. Word that General Motors will be aiming to close some factories next year – five plants in the U.S. and Canada – only fuels the worry.
What started as a fairly optimistic year is gradually turning more and more pessimistic.Yet will 2019 really be as bad as some might think? Here's a glimpse at what could happen ahead:
What about the next recession?
Sure, more red flags are out there – including mounting corporate debt, higher borrowing costsand the ongoing tariffs that are part of the trade war.
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We saw shocking, one-day declines of559points and 799 points for the Dow Jones Industrial Average during the first week of December. The Dow was down about 1.2 percent for the year through Dec. 10.
We're also seeing key warning signs coming from a weaker housing sector, cooler rest-of-the world growth and rising interest rates, according toRobertDye, chief economist at Comerica Bank.
Is a recession a done deal for 2019? No, according to economists.
While recession risk is rising, many say solid growth in the nation's gross domestic product indicates that recession isn't in the cards for 2019. But 2020 is looking more iffy.
"I have increased my odds of a recession over the next 24 months to 40 percent," Dye said. He had put the odds at 35 percent in October.
Kurt Rankin, economist for the PNC Financial Services Group, said he'd still put the odds of a recession beginning in 2019 at one in four. If a recession doesn't take place next year, the odds go up to 40 percent that a recession would hit in 2020, he said.
"Recessions don't occur just because the economy has been expanding too long," Rankin said.
Even so, he wouldn't use a word like robust to describe the kind of year toexpect.
Think more in terms of "stable, uninspired, unexciting" for 2019, he said.
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How high can interest rates go?
Another quarter-point rate hike is in the bag at the next policy meeting for the Federal Reserve on Dec. 19.
If rates go up in December as expected, the federalfunds rate will edge up to a range of 2.25 percent to 2.5 percent. It would be the fourth rate hike in 2018 – following five other rate hikes since the end of 2015.
TheFederalReserve last raised rates in late September, once again driving up the cost of borrowing for consumers and business.
Many economists, though, are dialing down their forecasts for rate hikes in 2019. Instead of three or four more rate hikes, many now saythe Fed will slow its pace and nudge up rates one or two times in 2019.
PNC's Rankin expects the Fed to hold tight early next year and move to raise rates at meetings in June and September.
Growing storm clouds, though, mean the Fed likely would need to stop raising rates by late 2019 –and possibly move in another direction.
"By the end of next year, we expect the Fed to be forced to reverse course and start lowering rates," wrote Diane Swonk, chief economist at Grant Thornton, in a December report.
Why? The Fed could need to react late next year to signs that theeconomy is edging closer toward a recession.
While the Federal Reserve sounded "almost giddy" about the economy earlier in 2018, Swonk noted the Fed has shifted its tone lately.
Swonk has moved up her forecast for the next recession by six months and now expects a recession to hit in the first half of 2020.
Yet not all economists agree on how much higher rates can go.
Mark Zandi, chief economist for Moody's Analytics, said he's still expecting three to four rate hikes in 2019, as inflationary pressures will develop more fully next year.
"Growth will slow in 2019, but will remain strong enough to ensure that unemployment continues to decline and wage growth accelerates further," Zandi said.
"Fueling growth will be the waning boost from the tax cuts and big increases in federal government spending," Zandi said.
What's going to happen to my 401(k)?
All the volatility on Wall Street gives the Fed more room to pull back on raising rates. But it puts everyday investors increasingly on edge.
The Dow Jones Industrial Average was down nearly 9 percent from its record high of 26,828.39 points, hit on Oct. 3, through early December.
Brace yourself for more volatility ahead. The bull market might – or might not – survive long enough to make its 10th birthday next March.
Some Wall Street market watchers suggest trimming one's exposure to U.S. stocks. But you don't want to panic and bail, especially if you're investing for the long term.
David Sowerby,managing director and portfolio manager with Ancora Advisers, said some rebalancing may be worthwhile for many investors.
Yet he warned that there continues to be more risk in the bond market, as interest rates climb higher. So one cannot simply sell stocks and buy more bonds as a way to run to safety, Sowerby said.
If U.S. economic growth slows significantly next year, Wall Street could face more bumps ahead.
For long-term investors willing to take on more risk, Sowerby said, some beaten down groupsinclude emerging market stocks and select U.S. small company stocks.
Manage your risk. Some suggest lightening exposure to growth stocks. Consider parking some cash on the sidelines.
Make sure you're prepared to ride out a storm, though, by taking care to have cash in an emergency fund – and not blindly plowing every dollar into your 401(k).
Will it cost me more to borrow in 2019?
Short answer, it depends what you're buying.
If you're shopping for a home, there's a chance that rates can fall from here.
The 30-year mortgage rate is about 4.9 percent on average and could be heading toward 4.5 percent by the end of 2019, according to Greg McBride, chief financial analyst for Bankrate.com.
The lower rate is likely if the economy slows and we edge closer to a full-fledgedrecession in 2020.
A higher rate – closer to 5.5 percent – could be possible for mortgages if the economy keeps humming along and inflation picksup, he said.
McBride, though, says it seems more likely that mortgage rates will drop a bit later in 2019 as the economy loses steam.
If you're planning to buy a car, expect to pay higher rates since car loans track actions taken by the Federal Reserve more closely.
A five-year new car loan is averaging about 4.9 percent now, according to Bankrate.com. The average rate on a four-year used car loan is 5.72 percent.
"With another rate hike this month, and two next year, by the end of 2019, auto loan rates will average 5.35 percent on a five-year new car loan and 6.2 percent on a four-year used car loan," McBride said.
What's likely to happen to auto sales?
"Higher borrowing costs will crimp home and vehicle sales, both of which should be flat to down in 2019," Zandi said.
Charles Chesbrough, senior economist at Cox Automotive, is forecasting light vehicle sales in the 16.6-million range in 2019, that's down from a projected 17.1 million to 17.2 million cars and light trucks sold in 2018.
"These higher interest rates are starting to take a bite out of consumers' wallets,"Chesbrough said.
Chesbrough expects two, possibly three, more rate hikes from the Fed in 2019. Higher rates drive up borrowing costs, so it could be more costly to finance or lease a car later in the year.
Even so, he noted that 16.6 million is a fairly strong year for auto sales.
General Motors is shifting away from its mix of sedans and small cars to focus on theproduction of more profitableSUVs and trucks, as part of a restructuring plan to stay ahead of any broader economic downturn.
But overall, the U.S. jobs picture, including the auto industry, is expected to be good.
"We're not expecting any kind of collapse in the market," he added.
Contact Susan Tompor: stompor@freepress.com or 313-222-8876. Follow Susan on Twitter @Tompor.
