Economy and stock market: Is this 2021 all over again?
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It seems like just yesterday that the 2021 stock market was at an all-time high, meme stocks were roaring (kitty), crypto was up, and housing prices went through the roof (pun intended) as supply couldn’t keep up with demand.
With many of today’s economic trends eerily similar to those of a few years ago, are we doomed for another bear market downturn like the one we experienced in 2022? Is this another bubble waiting to burst?
2021 Economy vs Today
In 2021, the economic rebound from our self-induced pandemic recession was underway. As COVID lockdowns were lifted, household doors began to open almost as fast as their wallets. Americans wanted to travel, they wanted to spend, and they had the money to do so!
The government’s multiple stimulus checks helped build up consumers’ bank accounts, so plenty of spending ammunition existed. The Federal Reserve’s monetary policy was even friendlier, as interest rates were near all-time lows, and “free money” was available for all to borrow.
With cash readily available, customer demand began outpacing supply. We started to experience supply chain issues and inflation (the nemesis of economic growth) began knocking on our door, but that was a problem for tomorrow (2022). The International Monetary Fund (IMF) estimated global economic growth to be 5.9% in 2021. The economy was getting drunk with no hangover in sight.
Fast-forward to 2022, when the Federal Reserve stepped in to kill our buzz. Inflation was rising, and so were interest rates. Between March 2022 and July 2023, the Fed increased rates faster than they had in 40 years. In less than 18 months, short-term interest rates increased by 5.25%. The “free money” party was over, and the hangover set in.
Considering the drastic change in our monetary policy, the economy has been surprisingly resilient. Money is expensive now – really expensive! The more you pay for fixed expenses, like a 7% mortgage, the less money you have to spend on other things that stimulate the economy.
These higher borrowing costs have impacted not only individuals but also businesses.
How can we continue to spend and the economy continue to grow? Well, debt is one way. Government debt (federal deficit) is at an all-time high, and so is consumer debt (household debt). U.S. household debt is over $18 trillion, including record-high credit card debt of over $1 trillion.
2021 Stock Market vs Today
The peak of the 2021 stock market was the last business day of the year. The S&P 500 ended the year up 27%. The excess cash from stimulus checks and low borrowing costs led to speculative investing. Similar to today, the Reddit influencer Roaring Kitty was headlining news stories with the rise of meme stocks like GameStop and AMC.
Investors were turning into gamblers, and everyone wanted a piece of the action. The crypto market has seen a similar resurgence. In March of this year, Bitcoin surpassed its previous 2021 all-time highs. Today, over $2.3 trillion is invested in cryptocurrencies, with around $1.2 trillion in Bitcoin.
In 2021, just like today, the stock market was hitting new highs, and tech stocks were soaring! The growth came from traditional tech companies like Apple, Microsoft and Tesla. Today, companies tied to Artificial Intelligence (A.I.) drive optimism around revenue growth. As I write this article, Nvidia’s stock (the leading chipmaker for A.I. technology) is up over 750% since the beginning of 2023.
Companies like Dell, Adobe and IBM have also benefited from A.I. advancements. However, there seems to be more hopeful growth storylines now than in 2021. GLP-1 drugs (weight loss drugs) have also been driving stock growth in 2024. Local drugmaker Eli Lilly’s stock is up nearly 150% since the beginning of 2023.
Summary
It’s hard to overlook the economic and stock market similarities between now and 2021. In 2021, loose fiscal policies, stimulus checks, and low interest rates fueled consumer spending and stock market returns. It may take time, but today’s higher interest rates should dampen consumer spending and tame inflation. However, this same monetary policy may decrease economic growth, driving the economy into a recession.
With recent inflation reports beginning to slow, the Fed predicts one rate cut later this year. Consumers are hoping for some relief by refinancing debt and lowering fixed expenses, but the solution (for both the consumer and the government) might be to simply stop taking on more and more new debt.
On top of everything, it’s also an election year! What should you do? Find a trustworthy wealth management firm who can help you navigate turbulent times; build a financial plan that is right for you; and design a portfolio to withstand the unexpected and thrive for generations.
Evan Bedel, CFP, is President at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.BedelFinancial.com or email Evan at EvBedel@BedelFinancial.com.