4 ways a recession might play out
Americans are becoming more pessimistic about what the coming year could hold for them financially, with a Gallup poll reporting that 48 percent say the economy is worsening, up from 45 percent in December and 36 percent in October.
But if bad news is what 2019 has in store for us, no one should be caught off guard completely.
Frankly, I find it surprising that people are shocked that the stock market went down substantially two times in 2018. Do markets go up forever? No. Are 13.2 percent average annual S&P 500 returns since 2009 normal? No.
Our brains are designed to remember the good times and forget the bad times. This is why people believe that markets that are going up will keep going up, and may forget the impact of losing a portion of their portfolio like they might have back in 2008-2009.
Here are four ways things eventually could play out, if not in 2019 then perhaps soon after that:
- The next recession. The markets will go down drastically in the next recession and, like with any other recession we do not know how far the markets will drop. Consumer spending generally slows down considerably as people tighten their finances.
- Deflation. Recessions can bring deflation, which is when prices go down year after year. Deflation may come as this credit-fueled bubble bursts and people spend less and borrow less.
- Lower interest rates. The Federal Reserve likely will use its tools to try to fight the recession just like it did in previous recessions, meaning it will probably lower interest rates again, and we may even see negative interest rates in the United States.
- More borrowing. The Fed’s goal for using negative interest rates would be to encourage people to spend money instead of keeping it in banks and credit unions. It wants people to borrow more money, and lower interest rates should encourage people to spend using debt. That’s good for a debt-fueled bubble and our consumer-spending based economy.
Despite the concerns, 2019 could still be a good year in the market. But that does not mean that I would recommend throwing caution to the wind.
Craig Kirsner, president of Stewart Estate Planning Wealth Advisors, is a nationally-recognized author, speaker and retirement planner and the author of Retire with Confidence: Preserve and Protect Your Wealth and Leave a Legacy.