As we close out 2021 and move further away from the 2020 recession, many of us are still wondering when things will get back to “normal.” It is often tough to navigate the news and feel good about things, but if we look around, there is a lot of good happening right in front of us.
The U.S. economy is strong and should continue to get stronger
Since 2020, the U.S. economy has been on an upward trajectory recovering from the pandemic-induced recession. As our economy re-opened in late 2020 and early 2021, we saw substantial growth rates as we strived to get back to pre-pandemic levels. We are now sitting in “mid-cycle.”
Here are some things that are going on right now that are characteristic of this mid-cycle phase[1]:
Economic expansion continues with more consumer activity, strong consumer balance sheets, and rising corporate production and profits.
Acute supply-side pressures—including supply-chain disruptions and labor-market shortages—are creating more persistent inflation pressures.
Rising nominal wage growth is a boost for consumer spending, but higher labor costs and the struggle to fill open jobs are growing challenges for business activity.
The Fed's tapering of its quantitative easing suggesting less support and slower liquidity growth ahead.
The mid-cycle expansion is on a maturing trajectory, with sustained cyclical improvement the most likely scenario.
What to know about the mid-cycle phase:
The mid-cycle phase tends to be one of the longest sustained periods as we look at historical business cycles. We don’t know how long we will be in this phase, but while we are here it is important to pay attention to how the markets have responded in historical business cycles.
The mid-cycle phase tends to be the most volatile. If you have noticed more movements in the market lately, that is normal. While market volatility can be alarming, it is not necessarily a bad thing. The mid-cycle phase tends to produce positive returns. Volatility happens because there is a broader range of outcomes that can be expected by investors. During these times, it is extremely important to really tune out the noise and stick with your long-term plan. You should know exactly how much risk you can take on to achieve your goals, make sure that your investments match your objectives and then take advantage of the average returns that the market gives us. Consider the graph below:
I always enjoy showing this graph. It shows the annual returns of the S&P 500 going back to 1980. The red numbers show the maximum market drawdown during the year, while the bar shows the end of the year return. This illustrates how often we see big fluctuations in the market only to end up on top by year-end.
Re-opening is still a thing
Businesses are open, borders for the most part are open, but we are still “re-opening.” The surge of the Delta variant over the Summer slowed activity and delayed our projections on getting back to pre-pandemic production levels. However, despite the short-term setbacks our economy continues to be resilient, and we are seeing progress made to overcome delays.
At this stage of the business cycle, we tend to see a performance shift in the markets. The less cyclical industries like technology, healthcare, and consumer staples typically provide performance in recessionary and early recovery environments. During the pandemic, we saw strong performance from the growth-oriented technology companies that kept our economy afloat and benefited from monetary stimulus.
However, as monetary policy tightens, we expect that cyclical industries like financials, energy, and especially consumer discretionary goods will perform well.
Several industries still have room to grow and have not fully recovered from 2020. When you consider how hard travel and retail companies were hit during the pandemic, it is apparent that they still have room to improve.
What about inflation?
The result of the 2020 economic shutdown and the following monetary support has been inflation that is more persistent than anyone originally thought. Many analysts are indicating that inflation rates will converge back down to 2.5% at some point in 2022.
While inflation surprises are not good for anyone, we are not in a danger zone yet. Inflation tends to cut into company profits with increased costs, but as investors we can benefit by investing in companies and industries that are more price flexible. Overall, the stock market has outpaced inflation in the long-term, so it often pays to hold stocks as a way to combat a rise in prices for your retirement plan.
Stay calm and invest on
There is never going to be a perfect economic environment. Challenges and cycles are part of how the whole system works. If you have questions about how your financial plan may be impacted by the economy, let us know. That’s why we are here!
Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.
[1] Bullets taken from: https://www.fidelity.com/learning-center/trading-investing/markets-sectors/business-cycle-update
Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.