It was a year ago when the Dow bottomed out due to the COVID-19 pandemic. The average fell 34% from its mid-February high!
This was the fastest decline in history and temporarily halted an 11 year bull market. Then it took just six months to hit the February high and the Dow is now 75% off the bottom.
Both of these are very unusual facts that some people believe the stock market can only move in one direction. The story tells a different story. One way to describe the market could be walking up the stairs while playing with a yo-yo. The general direction is up, although there are a number of up and down cycles.
Often times, when your span of time is long enough, the stock market produces the greatest returns. Having to withdraw money during a down cycle can cause problems.
The rapid recovery and surge after the pandemic began was caused by an unprecedented amount of fiscal and monetary stimulus. The Federal Reserve cut historically low interest rates to near zero. It promised to ignore inflation and support the corporate debt market, and provided almost unlimited liquidity.
Congress spent huge sums of money that it did not have to start the virus-induced economic shutdowns. There have now been three direct citizen incentives and trillions of dollars of other spending on many things that aren’t even virus-related and that persist despite the growth of the economy. How long can this artificial environment last?
Now we’re being told that the nearly $ 2 trillion spent on just the last stimulus package is not enough and we should spend another $ 3 trillion on infrastructure. If we ran our households like this, we’d all be bankrupt. To see how fast the debt is growing, visit usdebtclock.org. Creepy!
We now hear screams to raise taxes on the rich. The problem is that there just aren’t enough people in that group. The place that is the ultimate destination and where the money is right now is IRAs and 401 (k) s, this is the only place Washington can find the money. Taxes will rise, but not just for the rich.
Inflation has to rise dramatically at some point. We can already see this in gasoline and lumber prices. Anyone who goes shopping seems to be seeing more inflation than official statistics. If inflation rises, the Fed will have no choice but to raise interest rates. This will not be beneficial for an already highly valued stock market.
We need to reward good financial behavior. Those who have saved have paid taxes and paid their debts. Most people have not taken out government loans or paid back loans as promised. I often hear from people: “Should I keep paying and be punished when others don’t?” That is a fair question.
Modern medicine is overcoming the tragic year 2020. These government expenditures were necessary and prudent. We developed vaccines in record time and secured the necessary supplies. We can see the end of the tunnel even though we are not quite there.
America is the strongest country in the world, but we have to make smart decisions and not pretend that one day we don’t have to pay the piper anytime soon. Reward good behavior, not bad. Realize that inflation and taxes must rise. The stock market is going to have a longer-term bear market at some point.
You have worked hard towards retirement all your life. Make sure you are ready for what may be the perfect storm.
Gary Boatman is a Monessen-based Certified Financial Planner and author of Your Financial Compass: Safe passage through the turbulent waters of Taxes, Income Planning and Market Volatility.