I have never believed you can see the future by comparing current economic factors to the past.

The current economic conditions validate my belief: they are so different that making that type of comparison would not provide valid signals.

Instead of trying to guess the future based on history, let’s look at the last three years to start to get an idea of what the next phase may look like…

And the best income investment for what’s ahead.

The Crash. In early 2020, the coronavirus pandemic spread across the globe. The U.S. federal government ordered much of the economy to shut down. The stock market crashed by 35% (S&P 500) within a few weeks. For one day, crude oil traded for a negative $37 per barrel. Chaos reigned. No one knew if businesses would even be able to continue. Congress passed, and President Trump signed, the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES), which paid hundreds of billions of dollars to businesses and individuals.

The Explosion. The 2020 stock bear market turned out to be the shortest in history. The CARES Act put cash in the pockets of stay-at-home workers. Online businesses saw sales take off. Trading stocks on apps like Robinhood became the thing to do. The Federal Reserve slashed the feds fund rate to zero percent.

The stock market recovered completely by late September 2020. The bull market continued through the rest of 2020 and all of 2021. From the March 2020 low, the S&P 500 gained 120%. The tech-heavy Nasdaq 100 stock index gained 140%. Meme stocks became a thing in 2021, with new traders making huge gains on near-bankrupt stocks like AMC Entertainment (AMC), GameStop (GME), and Bed Bath & Beyond (BBBY).

Many young, new-to-the-market traders believed that making money and getting rich was easy. There was no reason to go back to work if you could stay home and play the market like a video game, winning on every try.

Igniting Inflation. For January 2021, inflation came in at 1.4%. By May, it had topped 5.0%. The Fed and government officials called the rise in prices “transitional.” They were wrong. The government continued its spending pile-on with the $1.9 trillion American Rescue Plan Act passed in March 2021. In December 2021, inflation reached 7.0%.

Happy with their “transition” outlook, the Fed kept the fed funds rate at zero percent until April 2022. By then, inflation was at 8.3%, and the Fed board figured out they had been very, very wrong. At that time, the Fed started on the most aggressive trajectory of rate increases in its history. Inflation, however, has remained stubborn. The October rate of 7.7% was not far from the 8.3% average for the first ten months of 2022.

In 2022 we also learned that the dictators running Russia and China were not good guys and were not out to do what was best for the rest of the world. Who would have guessed?

As a result, 2022 has been a year of financial crashes. The stock market crashed, recovered, and crashed again. The bond market crashed. Bitcoin tanked. Crypto investors discovered that much of the crypto universe was (and is) a giant Ponzi scheme. Recently, Wolf Street shared a list of 1001 stocks that have dropped by more than 80% this year!

Investors and traders who jumped into the markets in 2020 and 2021 discovered that getting rich was not as easy as they thought and losing a large portion of their portfolio values was easier.

A New Normal. I think the disruptions of the three preceding years will have a lasting impact on the investment universe. There will be great opportunities, but it is unlikely that they will be the same ones that propelled the 2009-2020 bull market or the 2020-2021 bull market.

One easy prediction to make is that fixed-income investments will now pay attractive yields. A portion of a portfolio earning 7% to 10% with fixed maturities will bring some stability.

Different business sectors will lead the way. Business development companies (BDCs), which lend to small businesses, have already shown that they will thrive in a higher interest rate environment.

Real estate investment trusts (REITs) have been oversold this year. For example, this year, the SPDR Dow Jones RIET ETF (RWR) is down 25%. I like residential REITs as investments, and the new Home Appreciation U.S. REIT ETF (HAUS) gives excellent exposure to the apartment and single-family rental property markets.

A new normal means that in 2023, we need to watch and study to see which companies thrive and which left their better days in the 2010s.

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