Max Mcquiston of the Capital Group, who shared a similar example with me, suggested one would probably pay a lot more.
He was right. The only new, available F-150 within 20 miles of my office was listed at $80,800.
That’s an increase of 2,697% from 1973.
Could the S&P 500 keep up with either of those returns? The stock index was 103.3 back in January of 1973.
Today it is around 4,000. That’s a stunning rise of 3,772%!
Economic forecasting has been compared to driving a car blindfolded while getting instruction from a second person who is looking out the rear window. The Federal Reserve (Fed) has over 400 Ph.D. economists, and they are driving the $25 trillion U.S. economy.
In a healthy economy, technological progress leads to greater worker productivity and more profitability. Society benefits as this provides more of what people want. Improved productivity should also lead to higher incomes, which increases demand.
The U.S. government created approximately $9,000,000,000,000 in 2020 and 2021. There were two sources: Fed asset purchases and money direct to Americans from the U.S. Treasury. This created a sudden demand for all kinds of things. However, there was no increase in supply. We had shortages.
If demand goes up without an increase in supply, then prices rise. If supply falls without a decrease in demand, then prices rise. In 2020 and 2021, both occurred.
All this seemed temporary, and the Fed thought it was. It repeatedly told us it was “transitory” as it kept its focus on bringing down unemployment. Now unemployment is 3.6%, which is just one-tenth of a percent away from the lowest since WWII.
A shortage of workers is one of the most damaging kinds of shortages. It leads to higher wages, which leads to higher demand, which leads to higher prices, which leads to workers asking for higher wages. I think you can see where this is going.
Americans are making more money than ever before but notice that they are no better off than a year ago, and many are worse off.
Unemployment is hurting 1 out of every 30 people. Inflation is hurting 30 out of 30.
The Fed is raising rates to make it more expensive to borrow money. That will eventually cut demand by discouraging purchases of homes, cars, boats, swimming pools, etc.
The Fed would like to slow demand without destroying it. Fed Chair Jerome Powell recently admitted he has no idea what that exact rate is. He will raise rates until he sees (rear window) that inflation is not a problem.
Investors have compared this to what we endured in 1994 and 2000. The inflation rate in those years was 2.5% and 3.3%, respectively. This gave the Fed flexibility to stop or reverse course at any time. This time, the Fed will have to keep going until it knows it has stabilized prices.
Investors have been busy trying to figure out what all this will mean for them. If consumer demand falls, then profits would undoubtedly be affected. Of course, the Fed would like to make this as comfortable a process as possible. We are all crossing our fingers that it will be able to do so.
Many will make guesses about the outcome, but predicting the short-term future of the stock market is nearly impossible. The long-term direction is different. History has shown that the stock market has risen and rewarded the diversified investors who hang in there.
Listen to a deep dive about the US economy on the Power Up Wealth podcast.
*Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. Diversification does not guarantee results. This is not a recommendation to purchase any type of investment.
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