January 2, 2022

by Stephen Stofka

“We wish you a Merry Christmas and a Normal New Year” could be this year’s chorus. We left normal about 13 years ago when the global financial crisis erupted. Twenty schoolchildren were massacred at Sandy Hook Elementary in 2012. When Congress could not agree on any weapon restrictions, we knew we had veered onto the land of abnormal. In 2016, 60 million people voted for a candidate with no political experience. They had stopped believing in the normal and now embraced the abnormal. When the pandemic emerged in 2020, we stepped off the gangplank into the dark waters of the unnormal. That year a record number of people voted for a candidate who had spent most of his adult life in politics. They voted for normal.

On January 6^th, 2021, the abnormals stormed the halls of Congress. They wore American flags and big bull horns and painted their bodies red and blue. They believed in a vast conspiracy. They had convinced themselves they were heroes. American cable and social media had created a funhouse of distorted reality and values. In that palace of crazy where everyone looked warped and bent, the warped and twisted looked like everyone else. Acting irrational became a strategy.

What is normal? In the past ten years, the SP500 has nearly quadrupled. Investors know the momentum can’t last but when will it end? Abnormal returns don’t return to normal. They pause then lurch in a different direction. The latest craze has been ESG funds, which grew by another $120B this year, according to Bloomberg. As the dot-com craze and the housing boom showed, investment flows can be fickle.

The flow of goods and services in the economy is more stable but the pandemic upset that dynamic balance. As we avoided close contact with others we diverted our purchasing power from services to goods. In April 2020, orders for durable goods fell 36% from the previous year’s level, comparable to the decline during the 2008-2009 recession (FRED, 2022). Production of gasoline fell 25%. National refineries did not return to their former level of production until April 2021(EIA, 2022). Durable goods boomed back in the spring of 2021. Federal relief supported many families but helped fuel inflation in a distorted economy. When and if the pandemic eases and people resume their habits, the economy may discover a more familiar equilibrium. That will help relieve price pressures.

What will relieve the erratic sentiments that drive investment flows? Casual investors who are young can afford to follow an investment theme. Older investors must protect their savings and avoid chasing the latest passion. A portfolio can protect us only if we protect it.

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Photo by Christophe Hautier on Unsplash

EIA. (2022). Weekly petroleum status report – U.S. energy information administration (EIA). Retrieved January 1, 2022, from https://www.eia.gov/petroleum/supply/weekly/. Table 3.

FRED (Federal Reserve). (2020, November 4). Manufacturers’ New Orders: Durable Goods (DGORDER). Retrieved January 1, 2022, from https://fred.stlouisfed.org/series/DGORDER#0