Despite the current downturn in the markets, when fourth-quarter GDP data is released later this week, it will show that 2021 finished on a high note. Unfortunately, the high note included not only strong economic growth but also rapid inflation. This shouldn’t be a surprise; it’s what you get when you mix a huge surge in government spending with a very loose monetary policy.
At present, we estimate that real GDP grew at a 5.7% annual rate in the fourth quarter. If we’re right, then real GDP grew 5.2% in 2021 (Q4/Q4), the fastest pace for any calendar year since the Reagan Boom in 1984. However, that rapid growth follows a 2.3% contraction in 2020. As a result, real GDP at the end of last year was up only 1.4% annualized versus the end of 2019 (the last quarter before COVID). That’s slower than the pre-COVID trend in economic growth, which means that despite the fastest growth in decades last year, the economy remains smaller than it would have been if COVID and all the related lockdowns hadn’t happened.
Glass half-full, glass half empty? The same can’t be said about inflation, which is clearly higher than the pre-COVID trend. We estimate that GDP prices rose at a 5.9% annual rate in the fourth quarter, which would bring the 2021 (Q4/Q4) increase to 5.6%, the highest inflation for any calendar year since 1981. That follows a moderate 1.5% gain in 2020.
Bear in mind that we get a report on Wednesday that will tell us about inventories and international trade in December, and those figures may change our projections a little. Look for continued growth in 2022, but not nearly as fast, as the artificial “sugar high” from excessive government spending runs its course.
Now to the markets and corporate earnings. We have seen so far this year a drop in the Nasdaq (technical stocks) of 16.8% and a drop of 11.67% for the S&P 500. Anything over 10% is called a correction. Understand that we normally get at least one 10% correction almost every year. The rub is when the year starts with a correction.
The reason for this downturn is uncertainty on several levels. One, the Ukraine saber-rattling is so disconcerting since no one knows how President Biden is going to react. Two, the Fed has promised to increase interest rates and we don’t know when or how much. Three, Corporate earnings for the fourth quarter have begun and it is uncertain what the numbers will look like. And finally, investors are scared that the markets may be overvalued since there has been an unprecedented upturn since the market downturn of 2020.
Markets do not like uncertainty and that is the reason for this downturn. Is it sustainable and should we reposition our investments because of the downturn? The answer is a qualified no to sustainability and no to repositioning the investments. We are investing in this market because we are clearly in a secular bull market. The last secular bull market was 1982 – 2000. The average return was over 14% per year. There were numerous 10%+ downturns during those 18 years but trying to time in and out was impossible. The best strategy is to ride them out so that you have a chance to achieve the average return for this cycle. The average return for secular bull markets for the past 200 years according to Michael Alexander in his book Stock Cycles is 13.5%.
I do not intend on changing or moving any investments other than repositioning for the upturn when it comes. Stay the course is the only strategy during these volatile periods within these long-term cycles. If you are nervous and need some reassurance, please call and set a time to talk.
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