The Economy and the Stock Market: Is This 2021 Again? – Inside Indiana business

It seems like just yesterday that the 2021 stock market was at an all-time high, meme stocks were buzzing (kittens), crypto soared and housing prices went through the roof (pun intended) as supply couldn’t keep up with the request.

With many of today’s economic trends 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

By 2021, the economic recovery from our self-induced pandemic recession was underway. As the COVID-19 lockdowns were lifted, the doors of homes began to open almost as quickly as their wallets. Americans wanted to travel, they wanted to spend, and they had the money to do it!

Numerous government stimulus checks helped build up consumer bank accounts, so there was plenty of spending ammunition. The Federal Reserve’s monetary policy was even friendlier, as interest rates were near all-time lows and “free money” was available for anyone to borrow.

With cash readily available, customer demand began to outstrip supply. We started experiencing supply chain issues and inflation (the enemy of economic growth) started knocking on our door, but that was a problem for tomorrow (2022). The International Monetary Fund (IMF) estimated that global economic growth would 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 raised rates faster than in 40 years. In less than 18 months, short-term interest rates increased by 5.25%. The “free money” party is over and the hangover has begun.

Given 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 affected not only individuals, but also businesses.

How can we keep spending and keep the economy growing? Well, debt is one way. Government debt (the federal deficit) is at an all-time high, and so is consumer debt (household debt). American household debt is over $18 trillion, including record credit card debt of over $1 trillion.

Stock Market 2021 vs Today

The peak of the 2021 stock exchange was the last working day of the year. The S&P 500 ended the year up 27%. Excess cash from stimulus checks and low borrowing costs led to speculative investment. Similar to today, Reddit influencer Roaring Kitty was in the headlines as the shares of memes like GameStop and AMC soared.

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 the all-time highs of 2021. Today, over $2.3 trillion is invested in cryptocurrencies, with about $1.2 trillion in Bitcoin.

In 2021, just like today, the stock market was hitting new highs and tech stocks were soaring! Growth came from traditional tech companies like Apple, Microsoft and Tesla. Today, companies connected to Artificial Intelligence (AI) drive optimism about increased revenue. As I write this article, Nvidia stock (the leading maker of chips for AI technology) is up over 750% since the start of 2023.

Companies like Dell, Adobe and IBM have also benefited from AI advances. However, there appear to be more hopeful growth stories now than in 2021. GLP-1 drugs (weight loss drugs) have also fueled the stock’s growth in 2024. Local drugmaker Eli Lilly’s stock is up nearly 150% since beginning of 2023.

Briefing

It’s hard to overlook the economic and stock market similarities between now and 2021. In 2021, loose fiscal policies, stimulus controls and low interest rates boosted consumer spending and stock market returns. It may take time, but today’s higher interest rates should reduce consumer spending and moderate inflation. However, the same monetary policy can reduce economic growth, leading the economy into recession.

With recent inflation reports beginning to slow, the Fed anticipates a rate cut later this year. Consumers hope for relief by refinancing debt and reducing fixed costs, but the solution (for both the consumer and the government) may simply be to stop taking on more and more new debt.

After all, it’s also an election year! What should you do? Find a reliable wealth management firm that can help you navigate turbulent times; build a financial plan that’s right for you; and design a portfolio to weather 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 [email protected].

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