2021 was a banner year.
All sorts of records were closed.
Did you close any?
Whichever way, I thought so.
After the marketâs brief ~35% correction from Feb to March 2020, stocks, or shall I say, stonks (memified version) blasted to the moon!
In terms of economic growth last year, growth hasnât been this stellar since the mid-1980s. Fueled by trillions in government aid on the fiscal and monetary side, unemployment dramatically dropped to less than 5% in less than 2 years, more unprofitable companies went public through SPACs and IPOs, capital fundraising neared $700bn, and trillions in savings strengthened consumersâ balance sheets, bargaining power, and of course, choices, lots of them.
So much so, amid a deadly pandemic, the Great Resignation sprung about. As Americans reconsidered their work situation, flexibility, and obsessed over the convenience of being homebound, not to mention the immense cost and time savings, those that wanted to, could with plenty of power in their hands. So much so that there are currently more jobs to be filled than Americans looking for them and more drivers staring at empty lots.
Not only employment but diversification within our income streams flourished. With inflation stubbornly high, it isnât certain that wages are keeping up for lower earners. As a safeguard, side-gigs to self-employment and patent registrations for businesses rose astronomically. A record number of entrepreneurial babies were born since March 2020! This one included!
When in doubt, create a business. Youâll regret the things you didnât do, not the mistakes you made.
And if youâre wondering, clearly thereâs never a wrong time to start a business, even during a brief recession and complete uncertainty. Those who planned on retiring in the distant future, in less than 5 years, took a leap of faith and retired earlier than expected.
Even audacious students my age decided to take charge of their mental health and this new hybrid lifestyle by embarking on a gap year or graduating early. There are far too many opportunities in this hot tight labor market and gig economy not to take advantage of!
Above all, we cannot forget the mighty and powerful lifesaver that brought back a sense of normalcy: vaccines. Although vaccination rates have stagnated in the states at the end of last year, they are slowly rising. Slowly but surely.
Yet we cannot let our guard down in the 3rd year of the pandemic. We must all adjust to a new way of living with variants emerging every once in a while through an endemic. Of course, after a record year in the markets, we cannot keep dreaming and expect high-flying tech, meme stocks, and unprofitable empty movie chains to be the best performers in our portfolios forever! What is this? 2021 2.0?
At least fundamentals and valuations are reuniting and there are great opportunities and deep discounts in the markets right now with expensive and speculative stocks such as Big Tech trading at 50â80% off their all-time highs.
Yet all of this comes to show nothing lasts forever.
Itâs inevitable. Records wonât keep roaring. Capital fundraising and investments to IPOs and retirees are walking in place. Now weâve come to the stage of the Great Reshuffle. Prices are still at elevated and unreasonable levels, especially for the most expensive purchase of our lives, our homes yet luckily the Fedâs aggressive monetary policy will help curb inflation and alleviate inventory, paving the way for cashed-up buyers instead.
Alongside prices, oil spikes, soaring inflation, supply chain bottlenecks, geopolitical tensions, and bearish flat and negative end-of-year estimates, there is a flurry of speculation around a recession. This past week several notable financial firms, specifically JPMorgan warned in their annual shareholder letter a recession is imminent and the road looks steeper ahead. Although many economists and analysts are concerned as well, there are mixed emotions throughout.
Slower and Steady Wins the Race
Too much of anything is a bad thing. This is a powerful life lesson you need to adopt everywhere in your life, not just in your diet. No matter how much broccoli you crave, eating too much will give you digestion issues and still increase your calorie count.
Everything counts after all, including in this hypersonic overvalued, and speculative market that is in murky waters now. Whatâs absolutely fascinating and REAL about the markets is that uncertainty is its worst enemy. Although the markets are a leading indicator, able to predict the market for 6â12 months out, it acts in real-time, real fast.
Strange enough, days leading up to Russiaâs invasion, the markets were in free fall. Once the invasion, occurred, the markets rallied. Same thing in March prior to Powellâs remarks on hiking interest rates by 50 basis points. The day after, can you guess how the markets reacted?
Although oil giants such as Chevron, Shell, and Exxon are suspected of taking advantage of hiking gas prices, blaming geopolitical tensions that donât directly impact Americans as much as in Europe which relies on 40% of its natural resources and oil from Russia, American consumers are still relentless and more than ready for a wild summer vacation full of spending and time off.
A recession, defined by more than 2 quarters of decline in GDP growth is usually correlated with high unemployment and job losses. The Fedâs plan is to cool down inflation which will inevitably lower prices and in tandem, demand. Lots of it.
The 30-year fixed-rate mortgage, based on the 10-year Treasury bond yield, not the FFR rate, is already at 5%, its peak since 2018 and is only climbing from there. Are consumers reacting and possibly too confident they can weather the storm?
Economists, analysts, and the Fed think so and believe they need a reality check.
In every environment, the goal is to have Americans shop till they drop and pay off their liabilities, but for the economy to function and run smoothly, a slowdown and curbing of stimulus will lead to a healthier rebound in consumer spending in the long run since moderation is in check. Ports wonât be backed up for months and prices wonât be near the moon. Anyways, Iâm sure you really donât need that extra car or 2nd vacation home.
Their wallets will thank the Fed. As consumer demand has been bolstered by the immense stimulus from the start of the pandemic, this has caused extreme volatility, speculation, and pure froth to flourish. Rents are climbing and so are consumersâ demands so taming all of this down is beneficial, not destructive.
Win-Win Scenario
The ideal state of the economy is a goldilocks scenario. Not too hot or cold. In life, itâs beneficial as well.
As I always repeat to myself, donât make the highs too high or the lows too low. Stay neutral and pragmatic to always be surprised! In this environment with consumers keeping more emergency cash on hand and more income sources on deck, they have a cushion against any slowdown.
As for now, consumers donât seem to be deterred by higher prices. I only hear more parties in the city and people eating out.
Compared to prices, interest rates are a different story especially since the housing market has been pricing buyers out since early 2021 with listings above the asking price by 2â5x.
Although the Fed may be late with pressing the breaks and preventing a boom and bust cycle, possibly dipping into stagflation territory if not sooner, this is a good reminder to always stay vigilant, plan for the worst, hope for the best, and not to mention, cash will forever be king.
A recession by definition isnât just a slowdown, it is greater than that. The economy and most importantly consumers are much stronger, and hopefully wealthier now to weather any storm.
By slowly raising interest rates and making it more expensive to borrow, demand will be curbed with spending but not enough to cut jobs, a real sign of a recession.
Economic growth forecasts are expected to be lower because this is a year after a record one. After you crush your high score, it would be selfish to believe it will only happen again!
Supply chains need time to catch up and consumers need to pull back. As long as you have multiple streams of supplemental income, stay diversified, invest consistently, save more than you spend, and rely on yourself, no one else, you should be safe and sound for now.