Following up from my last post, I want to cover the potential risks that could affect everyone for the rest of 2021 and into 2022 regarding the economy and financial markets. Overall, the biggest risks fall into four areas: Debt, income, inflation, and housing.
Debt & Income
As many of you are aware, the federal government of the United States (and many other countries around the world) passed stimulus bills exceeding $5 trillion from March 2020 through March 2021. This included direct payments to citizens, a freeze on student loan interest and payments, expanded unemployment benefits, creation of the Paycheck Protection Program, a mortgage forbearance program, renter eviction moratoriums, bailouts for various industries hurt by the pandemic, and more. Now that there are multiple Covid-19 vaccines being widely distributed, the United States is returning to ‘normal’ faster than most other countries around the world. What does this mean going forward?
With the recent data showing a faster economic recovery and a record number of job openings, expanded unemployment benefits and stimulus checks should come to an end. For those that stopped paying student loans, rents, and mortgages, payments will resume and, in some cases, need to be back paid. The resumption in these payments will manifest as a drop in consumer spending and reduced growth of the economy. Additionally, businesses that barely survived the pandemic will have to get back on their feet or close their doors. Any businesses that do close their doors will add to the permanent jobs lost during the pandemic.
Inflation
On top of what should be a drastic reduction in federal spending and the resumption of normal payments on student loans, rent, and mortgages, consumer prices are increasing across the board. Many companies have come out saying they will be raising product prices, citing rising production costs. These companies include Coca-Cola, Heinz, Kimberly-Clark, Proctor Gamble, Clorox, General Mills, and Kellogg. Have you noticed your grocery bills (and other bills) increasing? This inflation increases the cost of living for all of us as prices rise, at least in the short term.
The Federal Reserve has said inflation is “transitory,” but only time will tell if they are correct or not. Even if the Federal Reserve is correct, this may be a ‘step-up’ in prices of about 5% in the short term with ‘only’ 2% (or so) prices increases per year going forward. In this case, the “transitory” inflation will still hurt consumers, with more of the effects impacting middle- and low-income individuals and families.
Housing
At one point this year, there were more realtors in the United States than houses for sale. In April, the year-over-year housing price index hit a new record of 15.7%, meaning the average $300,000 home in April 2020 was worth $347,100 in April 2021. There is a shortage of housing supply. Home builders are reluctant to build too many homes too quickly with many still feeling the scars from the housing crisis from 2007-2009. This causes demand to be high and supply to be low, which results in higher and higher home prices. Add big corporations to the list of buyers of rental real estate, and you have an extra catalyst for home prices to increase. However, there may be signs the housing market may be cooling down. Even if the housing market is cooling down, one thing is clear, housing is much more expensive now than it was before the Covid-19 pandemic began.
Wrapping Up
Debt, income changes, inflation, and housing all pose risks to the rapid economic recovery the United States has experienced. These risks get added on top of a speculative investing environment with stocks that seem to go nowhere but up. For me, I’m ‘taking some chips off the table’ and raising cash to gradually reduce my stock market exposure. I’m not saying the stock market can’t keep going straight up from here, or to sell all your stocks. I’m not selling all my stocks. I’m just saying that I’m reducing my risk to preserve my capital and the gains I’ve seen, especially over the last 18 months. If you’re investing in the stock market, you need to have a plan. It can be to raise cash. It can be to buy and hold. Or it can be anywhere in between.
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