(NYTIMES) – As Covid-19 vaccinations spread, the stock market has generated fabulous returns. Many of the economic figures have been almost as impressive. If you’ve kept broadly diversified equity funds over the past year, reading your most recent portfolio statement will be a joyful experience.

Savor these sky-high earnings while you can. But when such garish numbers emerge, it’s worth asking why. And, unfortunately, the more precise answer is probably the simplest: Things were so terrible a year ago that they had nowhere to go but upwards.

There have been some mediocre stretches in the stock market lately. But compared to the first days of the pandemic in the United States, we have entered a period of balm and happiness. The never-ending tragedies of last year, followed by a partial, money-infused recovery, skewed the numbers enough that any comparison was taken with a whole shaker of salt.

But there are already warning signs of trouble: signs of nascent inflation, rising bond yields and occasional shaking in global markets in response to coronavirus outbreaks.

For the most part, however, these portents are stifled by profit making.

Remember how bad it was

When people started to get sick and die and the terrible toll from the coronavirus began to be understood, the markets and the economy collapsed.

These are not words I would use casually, but they are appropriate here. In just over a month, from February 19 to March 23 of last year, the stock market fell 34%.

As businesses closed and workers stayed at home, the gross domestic product (GDP) of the United States, a large measure of goods and services, plummeted. GDP fell 5 percent in the first quarter of last year and more than 31 percent in the second.

The unemployment rate jumped more than 10 percentage points from March to April last year, reaching almost 15%. This is the highest level and the largest increase since the Bureau of Labor Statistics began collecting data in January 1948.

Biden’s boom

All of this contributes to what looks like a “Biden boom economy,” as Princeton economist Alan Blinder called it in the Wall Street Journal. Economic growth could exceed 7 percent for the first quarter of this year, and will almost certainly be spectacular for the year as a whole, compared to last year.

But here is the catch. These annual economic and financial figures are comparisons with the depths of the pandemic. The statistics are inevitably skewed by “base effects” – that is, in economic jargon, that the coronavirus-induced recession last year makes many current numbers appear unusually high.


Harvard economist Alberto Cavallo, who has studied inflation in depth, told me that by drastically changing consumption and supply patterns, the pandemic has had many subtle effects. Low-income people, for example, who pay a higher proportion of their income for food, have experienced higher inflation than those for whom food is a relatively minor expense.

On the supply side, he said, a huge range of items has become difficult or impossible to find as supply chains have been disrupted. Due to concerns about the “fairness” of a price increase in a global disaster, many distributors have refrained from doing so. They have started now, he says. And prices have started to rise on items where demand is picking up, such as fuel and transportation. As a result, inflation is indeed rising and fears that it will continue to do so have contributed to higher yields in the bond market.

The White House Council of Economic Advisers and the Federal Reserve both take a more optimistic view of inflation, saying that while the numbers are likely to rise over the next few months, they are expected to decline over time and will not threaten inflation. ‘economy.

Risk abounds

The risk is there, even if it is not widely recognized. You don’t have to be a follower of the great monetarist Milton Friedman to see it. He once said: “Inflation is always and everywhere a monetary phenomenon. Well, the Fed has pumped money into the economy since the start of the pandemic, and the measure of money supply, known as M2, is growing as rapidly as ever in modern times. By the end of this year, it is on track to rise 40% above its pre-pandemic level.

As Mr. Ian Shepherdson, chief economist at Pantheon Macroeconomics, an independent research firm, put it: “Nothing like this has ever happened before, and you don’t have to be a monetarist to consider an investment. monetary expansion as massive as potential inflation. threat.”

There are other threats to the recovery and the bull market, too many to list. The possibility of calamity cannot be ruled out, as economist Robert Shiller observed in a look back at the hustle and bustle of the 1920s, which ended in the Great Depression. Bonds, which are currently lagging behind, are likely to outperform stocks if the market goes really badly, which is why I own some bonds.

If you think you are likely to get higher returns from the stock market in the very long term, like I do, now is the time to prepare for a bumpy road. Hang in there, but don’t be too greedy.