COVID-19 Continues

COVID-19 continued to dominate headlines, but the US economy has rebounded dramatically. Rising vaccination rates and the gradual lifting of local government restrictions caused the US economy to reawaken and accelerate in 2021. COVID-19 is seemingly becoming endemic, much like the flu or common cold. In any case, the impact on the US and the global economy is still occurring but arguably not as severe as in March 2020 to May 2020 when shelves were empty of basic necessities and unemployment spiked to nearly 15%, the highest level since the Great Depression.

Inflation is Back

However, the slowdown and low demand for many products and services in 2020 caused manufacturers and suppliers to reduce output. When demand snapped back, they could not keep up. Supply chain shortages exacerbated by worker shortages caused by COVID-19 sicknesses, retirement, and labor competition caused inflation to surge to the highest level in decades. Other influences on the supply chain and inflation were the well-publicized global shortage of semi-conductors, the blockage of the Suez Canal by the container ship Ever Given, the loss of oil and natural gas production in Texas during the deep freeze, the Colonial Pipeline disruption, and Hurricane Ida.

Through November 2021, consumer prices were up 6.8% in the past 12-months. This increase was the largest increase since June 1982. Much of this increase has been driven by volatile energy (+33.3%) and food prices (+6.1%). In addition, we are all experiencing pain at the pump as gas prices increased about 58.1%. However, the core CPI rose only +4.9%, and the US Federal Reserve’s favorite measure of inflation, the Personal Consumption Expenditures Price Index, is up 5.7% in November 2021.

Source: US Bureau of Labor Statistics

US Economy is Growing the Fastest in Decades

First, a little history. It was a painful time for those of us who were alive in 1982. The US was in a deep recession lasting from July 1981 to November 1982. Moreover, it was the second recession in a short period after the first half of 1980. This period was the worst economic recession since the Great Depression. The unemployment rate reached about 10.8% and stayed above 10% for ten months, but it was higher in residential construction at 22% and auto manufacturing at 24%. Some estimates state that about 75% of job losses were in manufacturing. The US GDP contracted about 2.9% over the period.

However, 2021 was not 1982, and the US economy grew rapidly. US GDP was up +2.3% in Q3 2021, +6.7% in Q2 2021, +6.3% in Q1 2021, and +33.8% in Q3 2020. Fiscal and monetary stimulus combined with pent-up demand has caused the US economy to grow the fastest since 1984. 

Source: US Bureau of Economic Analysis

For monetary stimulus, interest rates were low as the US Federal Reserve has kept the Federal Funds rate at 0% – 0.25% and was buying $120 billion in bonds per month. In addition, The US Congress passed several bills included the $2.2 trillion CARES Act in 2020 and the $1.9 trillion American Rescue Plan Act in 2021, and the $1 Trillion Infrastructure Investment and Jobs Act in 2021.

This growth has lowered unemployment. The US unemployment rate plunged after spiking in 2020 and is rapidly approaching pre-pandemic levels at about 4.2%. It seems likely that low unemployment will be here for some time. Reportedly, unemployment claims hit their lowest level since November 1969, dropping below 200,000 per month. The number of job openings has been near a record at roughly 11 million for the past several months. America is creating about 555,000 jobs per month on average. To put these numbers in context, the US lost 149,000 jobs in December 2020 and created 49,000 jobs in January 2021. Additionally, the unemployment rate was 6.7% at the start of the year. 

Source: St. Louis Fed

Stock Market Continues Its Momentum

The stock market’s momentum from the second half of 2020 continued into 2021 despite worries about inflation. Some sectors and companies have benefitted from the work-at-home and play-at-home trends. For instance, consumer staples companies have had difficulty generating consistent top and bottom-line growth. However, the pandemic has helped these companies as consumers stayed at home more than before. 

In addition, the reopening of economies globally improved the revenue and earnings outlook for many companies. As a result, the stock prices of travel, hospitality, entertainment, and other similar companies rebounded. Tech companies continue to benefit during the COVID-19 pandemic, which has shown up in their stock prices. For example, Apple (AAPL) and Microsoft (MSFT) are experiencing a boom in demand resulting in solid revenue and earnings growth. Their market capitalizations are more than $2.5 trillion, and Apple’s total valuation will likely soon surpass $3 trillion.

The year 2021 is the first since 2016 when the S&P 500 Index has outperformed the NASDAQ, and before 2016, it was in 2011. The S&P 500 is up 29.5% year-to-date (YTD) and the NASDAQ is up 23.6%. The last quarter of 2021 has seen the prices of some tech stocks decline to near 52-week lows. Much of this can be traced to inflation and the Fed’s pivot to faster tapering and potentially three interest rate increases in 2022 after initially viewing inflation as transitory. Some investors are rotating into stocks that perform better during a period of rising interest rates. Other investors are worried about demand and growth for tech stocks in 2022. Many NASDAQ stocks were up in the second half of 2020, and the first half of 2021 plummeted. Examples include Peleton (PTON), Appian (APPN), Zillow (ZG), Plug Power (PLUG), Pinterest (PINS), Roku (ROKU), and others.

Source: StockRover*

The 2021 Year in Review – What have I Learned?

Crypto is Here to Stay

I was unsure about cryptocurrencies when they first showed up, but then they went mainstream. For instance, Elon Musk invests in crypto, Tim Cook, the CEO of Apple (AAPL), invests in crypto, investors can buy crypto through PayPal (PYPL), hedge funds buy crypto, and El Salvador made Bitcoin (BITCOMP) legal tender. The total value of Bitcoin is now more than $1 trillion, and reportedly the full value of all crypto is more than $3 trillion.

Cryptocurrencies leverage blockchain technology and the concept of digital currencies. The largest and most liquid cryptocurrency is Bitcoin. Bitcoin acts like gold in that it is perceived as a store of value, but it does not pay interest or dividends. There are other parallels too. For example, a limited amount of Bitcoin and gold are mined each year. Additionally, there is a limited supply of gold and Bitcoin.

Other cryptocurrencies exist, but, in many cases, they are less liquid and riskier. Some were even started as a joke, e.g., Doge, and was up as much as 12,000% before Elon Musk called it a hustle. Furthermore, there are a lot of risks for cryptocurrencies since they are lightly regulated and still relatively new. So, despite going more mainstream in 2021, cryptocurrencies are still in the high-risk category for investors and not for everyone.

What Goes Down Must Eventually Come Up

The year 2020 was when oil prices went negative on the futures market for a brief time. Sellers were paying buyers to get rid of barrels of oil in April 2020. Oil majors and other energy companies stock prices plunged. However, what goes down must eventually come up according to reversion of mean. Oil prices rebounded in 2021 in a big way. Demand rose and accelerated as global economies recovered. Oil prices shot up and are now around $76.90 for West Texas Intermediate (WTI) and $79.19 for Brent. Oil companies became much more profitable, and their stock prices rose. 

This rapid change reinforces the point that investors should stay long and stick to the plan when they buy high-quality companies like Exxon Mobil (XOM) or Chevron (CVX), both Dividend Aristocrats. However, it also points to the fact that diversification is essential. An investor who was heavily invested in energy suffered unrealized capital losses. Paper losses can turn into actual losses with a few poor selling decisions.

Meme Stocks Are a Thing

A relatively new phenomenon is meme stocks. These stocks are highlighted in social media channels like Reddit and Twitter. Novice retail traders post about stocks to buy, sell, and trade. For example, Gamestop (GME) rose about 1,700% in weeks despite having poor prospects and declining sales and earnings. In some cases, buying of meme stocks caused a short squeeze for hedge funds, further driving up the share price. However, reality eventually set in as the stock prices declined again. Investing in meme stocks are a high-risk endeavor without a systematic or methodical approach. As a result, they are not suitable for retirement plans or generating long-term dividend growth.