Omicron is highly contagious but not as fatal as Delta and its earlier variants. Hospitals are crowded, deaths are high because we get drowned all at once.
By summer, we may have significant herd immunity between those individuals who maintain the booster injections and those who come out of an antibody infection.
This will make COVID-19 endemic and manageable as new drugs such as Pfizer’s Paxlovid are being used in large part. We will be able to deal with COVID-19 like we do with the flu.
However, the shutdowns in the near term will be temporary rather than comprehensive. Mass layoffs are unlikely, and companies have learned to operate virtually and boost productivity and profits.
Inflation is exploding at an alarming pace, and since the Korean War, no comparable rise in prices has been tamed without a recession. Either from a rapid rise in demand that faded from natural causes or from the Federal Reserve pressing the brakes.
Consumers and businesses are sitting on about $3 trillion in unspent relief payments for COVID-19, paying increases to those in strong negotiating positions and dividends that haven’t yet been distributed to shareholders or reinvested.
Americans will continue to spend even if they are forced to consume $50 liquor and rack of lamb in sidewalk igloos and attend concerts in the Metaverse.
Don’t count on the Fed to strip the troughs this time around. The three rate increases planned by President Jerome Powell are shy of the decisive action taken by Paul Volcker in 1979 and the early 1980s.
With ex-President Donald Trump waiting to regain the presidency, Biden contemplating a dove of vacant Federal Reserve seats and Powell’s preference for tight labor markets, monetary policy will be terribly restrictive. We are likely to see a period of sustained inflation and reasonably decent real growth.
No one can rule out volatility in the near term. Doubts abound from the threat of a Russian invasion of Ukraine to the prospects of a particular version of Build Back Better in Congress. And during epidemics, the predictions of business leaders, critics, and economists have proven futile.
Thus, with stocks selling near record levels, investors facing college or other immediate big expenses this year must weigh the sale now to put aside the money they need.
Long-term investors should consider inflation-era strategies.
Consumer goods, utilities, and real estate are among the usual prescriptions for the stock market. However, with supply chain disruptions likely to continue, manufacturers of consumer products cannot always deliver as planned. The situations in Ukraine and Iran make the energy supply and the profitability of electricity generation uncertain, and property values have just gone through a historical test.
Gold is supposed to be a safe haven in times of inflation, but it fell as prices rose in 2021. Cryptocurrencies have moved into the mainstream, but their prices are still terribly volatile.
Bond yields are well below inflation, and ETFs that track initial public offerings have generally proven losers or have delivered subpar returns. It is very difficult to pick out winners in a pandemic. Who would have thought with movie theaters swinging that AMC would be among the biggest winners in 2021? With production slashed due to chip shortages, Ford will double in value, and with Delta and Omicron once again delaying a return to offices, Peloton will be among the worst-performing stocks of the year?
About four-fifths of stock pickers in actively managed mutual funds underperform the S&P500.
A low-fee, passively managed S&P500 index fund or similar instrument remains better for long-term investors. Just put in a fixed amount each month.
Shares in the S&P500 are trading at about 30 times earnings, which is about 15% higher than the average for the past quarter century. However, the 25-year moving average and sustainable prices for US stocks have been on the rise for a generation as the economy shifts from capital-intensive manufacturing to high-tech and services.
During the recent period of recovery and inflation, companies raised prices relative to costs fast enough to generate strong earnings growth. COVID-19-inspired innovations are likely to deliver even more impressive productivity gains, and with most stimulus giveaways over, labor shortages should ease.
Stocks should continue to generate dividend yields that exceed nominal GDP growth – the sum of real economic growth and inflation. Not that we can’t make a correction or even a short-term bear market, but overall, a broad-based index fund like the ones sold by Vanguard and USAA will beat the stalking fads, ruminators of opinion leaders and stock pickers.
• Peter Morici is an economist, professor emeritus of business at the University of Maryland, and a national columnist.