The Economy, The Stock Market, The World A Word of Advice to Millennials and Gen-Zs

It’s been well over a dozen years since the last sustained “bear market” in this country, defined as a twenty percent correction in stock prices from a recent high. The COVID-related crash in March of 2020 was technically a bear market, but its duration was so short and the subsequent bull market so strong, that it created little to none of the anxiety associated with a traditional bear market.
   Millennials and Gen-Zs comprise a combined 68% of the workforce in this country. They also constitute the vast majority of the investing public that makes contributions to a retirement nest egg through payroll deductions into their 401(K) plans. Most of those workers are experiencing a first in 2022—a bear market that is wreaking havoc with their nest egg.
     How could the ebullience of last year’s market have turned so quickly into the desolation of today? How could inflation, which had lain dormant for more than a decade, have exploded in the course of just a few months? Why is it that the necessities of life—food, housing, gasoline—are almost out of reach for so many?
     And who is to blame for this disaster? The President, as so many seem naïvely to believe? The Federal Reserve, an entity that most Americans can probably not even define? Congress, everyone’s favorite punching bag? Corporate America? OPEC? China? Russia?
      At the risk of oversimplification, I will share my thoughts. Rising inflation, as well as the global financial turmoil of today is, I believe, the result of three separate, although not entirely unrelated, events that hit the world in rapid succession over the course of the last two years.
     The first was the onset, in the earliest days of 2020, of the worldwide pandemic that we all know as COVID-19. Spawned in China, it spread around the world with ferocious speed and deadly virulence. The response by Governments across the globe was an almost instantaneous mandate to quarantine, resulting in the shutdown of large swaths of the global economy. To offset the impact of the impending economic debacle, Governments provided hundreds of billions of dollars to companies—ensuring that businesses would continue to pay their workers, many of whom were in isolation.
     During those uncertain early days of the pandemic, consumer demand for numerous products and services—travel, entertainment, vehicles, gasoline, electronics and on and on—came to a near standstill, resulting in massive disruptions of inventories around the globe.
    Because of the precipitous decline in demand for energy—as travel by planes, trains and automobiles came to a virtual halt—the price of oil and gas declined to a negative number. That is right: the price of oil was below zero. Simply put, there was no place to store the excess oil and gas. Energy companies found themselves shutting down producing wells. At the same time, the stay-at-home population had little way to spend money, resulting in a soaring rate of personal savings. What was normally a five to seven percent rate of savings soared to just under thirty-five percent. As the second wave of the pandemic hit some eight months later, there was another surge in savings that didn’t return to below ten percent until the second half of 2021. See the attached two charts on the price of oil and the savings rate.
    Globalization—the powerful deflationary and beneficial force for the prior two decades, as corporations chose to source their products from countries with the lowest cost of production—suddenly became an albatross, stranding billions of dollars of foreign made products on ships on the high seas, as ports around the world were shuttered, and storage facilities were brimming full. As the economy gradually adjusted to the regulations designed to mitigate the spread of the disease, and an effort was made to turn on the spigot of manufacturing, the global supply chain was in tatters. Essential inventory necessary to allow the economy to gather momentum sat on the high seas, waiting for months to unload at a port.
    Today, nearly two years later, global economies have rebounded, thanks in large measure to the success of vaccines that have reduced mortality. Equally as beneficial has been the easy monetary policy that has flooded the world with cash. Much of that money has been channeled into liquid assets (stocks being the primary example) as well as into the purchase of real estate. A soaring stock market, however, did nothing to mitigate the economic disruption caused by the supply chain crisis which in fact was exacerbated in large measure because of the second exogenous event in this vicious cycle.
     China, the prime beneficiary of the trend of globalization, made the decision to maintain a zero-tolerance policy for COVID, shutting down cities including Shanghai, the world’s largest seaport and with a population of 25 million. Given the country’s role as the largest global manufacturer of products in high demand, a clash was inevitable. In classic economic terms, this is described as an imbalance between supply and demand. That condition was exacerbated by the third exogenous factor that took place in February of this year, when Russia invaded Ukraine, a country known as the “breadbasket of Europe.” Ukraine produces, as one example, 30% of the world’s sunflowers, the source of a high-demand cooking oil in the U.S and Europe. Combined with Russia, on which both the US and the EU have imposed an embargo relating to all agricultural products, the two countries produce 60% of the world’s supply. There are numerous other food stocks that are sources from that part of the world. The result was a sharp increase in the price for an array of agricultural products, as shown in the nearby chart.
    Thus, we faced a perfect storm. As the pandemic has waned, people flush with cash from the rise in the savings rate, an easy money policy and a rising stock market, have gone on a spending spree—houses, cars, appliances, travel, and on and on. With supply still constrained, there has been no place for prices to go but up. This includes energy, particularly gasoline, as oil companies have as yet been unable to ramp back up to pre-pandemic levels of production.
     So where do we go from here? Will this cycle of inflation be a repeat of the disastrous years of the 1970s, a time before the birth of the first millennial? There are those Cassandras who believe that will be our fate. I am not one of them. From my point of view, there is a more salubrious outcome. We are already observing that the rise in interest rates, engineered by the Federal Reserve, is dampening the demand for mortgages. In addition, the size of the average mortgage is declining, an indication that the price of homes is moderating. There are indications of some excess inventory, as consumers are balking against price hikes.
     With regard to the stock market, it is important to keep in mind that it is a leading indicator of economic activity. It cares not a whit about the past; rather, it is concerned about what the future holds. If energy companies can bring on more supply and if the red-hot real estate market can be tamed by higher mortgage rates, those will be positive factors for stocks. Supply chain bottlenecks should mitigate over the next several quarters, given that China has relaxed its stringent COVID rules. The recent rebound in the Chinese stock market is another indicator of an improving outlook for global economies. Tragically, the war in Ukraine looks to have no end in sight, and even more tragically, the high prices of both oil and gas have actually been a boon to Russia’s coffers. It is Europe—in particular, Germany—that is paying the price for the Faustian deals they made with Russia decades ago.
   The recent rebound in the U.S. equity market may be the beginning of a “summer rally” or it may reflect something more structural—a gradual U-turn in the supply chain crisis that has gripped the world for the past two years and has stoked inflation. There is likely to be continued volatility in stocks, as the economic news improves in fits and starts.
     In short, I think that most of the bad news is behind us and for those Millennials and Gen-Zs who have not had to swim up the tide of a bear market, I have one strong word of advice: stay the course. The nest egg you are building for your retirement will benefit from your taking the long view. Volatile markets provide an opportunity to “average down” and in ten, twenty or thirty years, you will be rewarded for your fortitude.