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The Best of Times and The Worst of Times

December 2021

Looking purely at the numbers, we are in a historic period of economic prosperity. Consider that the stock market is up 85% since January 2019 and up over 100% from March 2020 lows. U.S. GDP is expected to exceed 15% annual growth in Q4 2021. Jobless claims recently fell to the lowest level since 1969 with the unemployment rate at 4.2%. Wages, which have exhibited stubbornly low growth for over a decade, have been rising, up 4.8% on a year-over-year basis in November.

A Tale of Two Outlooks

Despite that economic backdrop, consider these numbers published in a recent AP-NORC Center for Public Affairs Research survey, which seem to reflect sentiments we hear in conversation regularly and often see in the financial press. Just 35% of Americans call the economy good, which is in-line with results recorded during the depths of the pandemic when the aforementioned economic data looked drastically worse.1 The same survey found that 47% of respondents expect the economy to deteriorate next year. If the old adage that “Bull markets climb a wall of worry” is correct, then this bull still has room to run.

Dour feelings on the broad economy aside, in the same survey, 65% of Americans are optimistic about their own situations and an even higher percentage express confidence they could find a good job right now, up from pre-pandemic levels. These readings seem more consistent with current economic numbers, so what is going on with this “Dickensian” outlook? A retrospective on how we got here may help explain the disconnect and offer guidance for the future.

It Was The Age Of Stimulus

The enormity of pandemic-related and follow-on fiscal stimulus of the last two years is unprecedented. Approximately $6.2 trillion has been authorized which includes $3.3 trillion passed in 2020 under the Trump administration and $2.9 trillion passed in 2021 by the Biden administration, including the recent infrastructure bill. In total, this equates to nearly $19,000 per person. For comparison sake, the New Deal  was “only” $6,280 per capita and the 2009 Recovery and Reinvestment Act seems trivial at just $2,725 per capita (both in today’s inflation-adjusted dollars).2  

Additionally, the Federal Reserve has added its own monetary policy stimulus. Recall that the Federal Reserve slashed short-term rates to near 0% at the outset of the pandemic and they have remained there since. Intermediate and longer-term rates dropped commensurately and were supported by a bond purchase program which saw the Fed’s balance sheet expand to approximately $9 trillion, more than double the $4.1 trillion level of February 2020. As a result of this massive stimulus, the national average for a 30-year fixed-rate mortgage is ~3.25% and the national average interest rate paid on a new car loan is 4.73%. Credit is widely available at near historically low interest rates.

We suspect that stimulus seems “artificial” to some and contributes to concerns about sustained economic growth, but there is little doubt that it met its objective by getting cash into Americans’ bank accounts. U.S. checkable deposits have grown 127% over the past year while cash on U.S. corporate balance sheets stands 45% higher than the average of the preceding five years.3,4

Too Many Dollars Chasing Too Few Goods

Turning to the topic of inflation, the November “all items” Consumer Price Index (CPI) rose 6.8% for the 12 months ending November 2021, the largest 12-month increase since June 1982. While most economists would argue that some level of inflation is healthy in an economy, signs of high inflation – something America has experienced only intermittently since the 1980s – are worrisome to many. Since inflation numbers are more tangible to the average consumer than GDP, we imagine many Americans are understandably stressed about their rising grocery and gas bills. The shortages in goods, longer wait-times and poorer service don’t make anyone feel better off either. Nonetheless, we should not ignore that inflation is simultaneously benefitting many by driving stock prices, home values and wages all higher.

The Market Casts Its Vote

The market is quite effective at finding the signal through the noise and has squarely voted in favor of  the “best of times” thus far. As it looks now, the U.S. stock market (as measured by the S&P 500) will finish the year higher by roughly 25% — a particularly impressive year following solid gains in 2019 and 2020 as well. Surely sorrow is to follow, right? (Or, as my mother-in-law would caution when watching the toddlers, “big laughs are followed by big tears.”) Not necessarily, at least when it comes to the market. Since 1950, there have been 19 years when the S&P 500 rose by 20% or more. In 16 of those instances, the markets finished higher the following year.

In addition to historical trends, valuation may be tilting in investors’ favor. Over the last year, corporate earnings grew faster than the stock market appreciated (as measured by the S&P 500), which means that the market now trades at a lower multiple of expected earnings than it did at this same time a year ago.

Spreading Tidings of Cheer

There will be decades for academics and news pundits alike to debate the long-lived impacts of these past few years of tax policy, government stimulus payments and balance sheet expansion from the Federal Reserve, as well as the inflationary pressures and speculation in a variety of risky assets. As with most things in economics, and as Dickens reminded us in his own way, there are always two sides to a tale.

Instead of getting excited about whether we are in the best of times with our home values and stock portfolios or worried about inflation and predictions of doom to come, we encourage you to appreciate this period of extraordinary growth in the U.S. economy. Few predicted it pre-pandemic and almost no one did at the depths of the market in March 2020.

The market is an unpredictable beast, which leads us to our final point: though we still see more to like than not in the tea leaves for the coming year, it is entirely possible that predictions vary from actual results. The latest Covid-19 variant (Omicron) is already putting a damper on some economic growth expectations, and occasional corrections are to be expected in “normal” markets. Hence, “sticking with the plan” and rebalancing your portfolios to long-term allocation targets seems to be the wisest advice we can give while awaiting the next chapter in this most interesting tale.

All market and economic data is sourced from Bloomberg unless otherwise noted.

1. AP-NORC Center for Public Affairs Research. (October 2021). “Pessimistic Outlook for the National Economy” []

2. Dupor, Bill. “How Recent Fiscal Interventions Compare with the New Deal.” Federal Reserve Bank of St. Louis. July 2021.

3. Smith, Talmon J. “Americans’ Pandemic-Era Excess Savings are Dwindling for Many.” New York Times. Dec 8, 2021.

4. Hirtenstein, Anna. “Companies Are Hoarding Record Cash Amid Delta Fears.” The Wall Street Journal. Aug. 16, 2021.


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