Market Report – Winter 2022

The stock market ended the final quarter of the year with some measures higher and some measures lower, though for the year markets were solidly higher. For 2021, large company stocks rose 28.7%, small company stocks rose 14.8%, and foreign stocks were up 11.3%. Domestic bonds for the year were down 1.5 percent.

The initial phase of the COVID-19 pandemic in early 2020 created a sudden freeze in global economic activity on a historic scale. In the following phase—roughly beginning June 2020 and continuing to the present—the economy has experienced an astonishing rebound surpassing all expectations. The rebound has been fueled by unprecedented government stimulus programs in various forms, as well as the deployment of effective vaccinations, which helped bring people out again.

Estimates for the rate of U.S. economic growth in 2021 are running around 5 percent—the highest rate in more than 30 years. Growing consumer demand, along with constrained supply due to production limitations, transportation bottlenecks, lots of cash in the economy from stimulus programs and other factors, are now stoking inflation. In November, the core inflation rate in the U.S. climbed 4.9 percent since the previous November. This was the highest rate in the U.S. for a 12-month period in decades.

Inflationary pressure is a warning sign of an overheating economy. Like other things that overheat (the author is remembering his ‘74 VW Beetle), this state generally ends in a breakdown of some kind. To cool the economy in December, Federal Reserve Chairman Jerome Powell—in an action now known as the “Powell Pivot”—reversed his forecast of transitory inflation to concede that it has become more stubborn and possibly lasting. As excessive inflation comes with economic risks, the Fed is expected to use its primary tool for cooling the economy: assertively raising interest rates in 2022. Rate hikes come with risks of their own, such as short-term economic oscillations and volatile investment markets. With skilled handling and a little luck, the Fed can cool the economy without letting it go cold altogether (also known as a recession).

Looking forward, the coronavirus variants remain a public health predicament. Some scientists now  believe that the pandemic will potentially transition into an endemic (regionally persistent viral transmission) in coming years. Annual revaccination would likely be a feature of this scenario, though the economic effects would be limited.

As mentioned, among the elements helping to stoke inflation in the U.S. has been robust consumer demand for services, but mostly for products. Armed with stimulus payments, lockdown savings and rising wages, consumers have fed a retail sales rebound of double-digit proportions in many categories. Retail sales in the clothing and accessories category, for example, rose 42% in November since the  previous year. The point at which consumption turns into overconsumption is not defined, though a look around the world might suggest the line has been crossed. Overconsumption may be defined as a situation in which the use of resources outpaces the sustainable capacity of the ecosystem.

Surging consumer consumption is an interesting question in the world today, and in the U.S. in  particular. Years of income disparity has resulted in a dramatic wealth divide. 2019 reports show that the top 10 percent of households in the U.S. hold 70% of the country’s wealth and the bottom 50% hold 2%. Connecting the dots between data of this sort and the problem of overconsumption leads quickly to the unsurprising supposition that the condition is driven by the country’s more affluent households. After all, lecturing the poor on overconsumption would be illogical. In 2022, the “haves” around the globe may benefit from heeding novelist and poet Wendell Berry’s sage advice on being a responsible consumer: “He would be a moderate consumer; he would know his needs and would not purchase what he did not need; he would sort among his needs and study to reduce them.”

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