Will we ever get back to normal?

Or, are we stuck in the new normal for an extended period?

Economically speaking in the U.S., the answer to the first question is “hopefully,” and to the second question, “probably.”  In the wake of the two-year COVID-19 pandemic’s massive effect on the global economy, Russia’s recent invasion of Ukraine has added another seismic shock to the system. So here’s what the new normal looks like now:

• Steep gasoline prices; higher prices for food and just about everything else.
• For months, record numbers of workers have been leaving their jobs, and as a result many have gained leverage. There’s a huge demand for workers and wages are climbing rapidly.
• The markets are sometimes whacky and investors are nervous.
• U.S. consumer demand has been steadily impressive through these two once-in-a-lifetime geopolitical events, and when you combine that with log-jammed or fractured supply chains, inflation has soared to a 40-year high.

The Fed goes on the offensive

In an all-out effort to try to tame inflation, the Federal Reserve could make 12 to 15 rate hikes in the coming months, according to a Reuters article. That kind of aggressiveness would mean increasing rates between 300 and 375 basis points (3% to 3.75%), which is a sizable jump from the seven total increases (1.75% to 2%) analysts have been saying we should expect this year.

But the Fed’s sharp moves increase the chances of a recession happening in 2022 — and could speed up the timeline, ushering in a recession well before the end of the year. Note to investors: If you haven’t met with your financial advisor lately to review your plan and go over your portfolio for unnecessary risk, it’s probably a good idea to get on their schedule soon. We could be in for a rocky road ahead.

In truth, the Ukraine drama has only been an accelerating factor to push us into the problems the market is experiencing right now. For months we’ve expected a slowdown in the economy, inflation was on the march long before the Russians were, oil and gas prices have moved steadily upward through the past year, and consumers have been battered for over a year.

Looking at inflation now and the surrounding factors compared with two and three decades ago is like night and day. For many years leading up to the pandemic, the economy grew slowly but steadily, with low inflation and interest rates. The Federal Reserve chairman, Jerome H. Powell, recently said, “For the last quarter century, we’ve had a perfect storm of disinflationary forces. As we come out the other side of that, the question is: What will be the nature of that economy?”

A big difference between now and then – the normal days – is demand; it was consistently weak pre-pandemic, but now it’s on steroids. When the coronavirus hit, governments around the globe spent massively to navigate businesses and workers through lockdowns. The U.S. spent close to $5 trillion. That money sparked more buying, but the supply chains were overwhelmed and couldn’t keep pace. And the costs went up and up.

As the economy reopened, companies rehired to meet the surge in demand, workers left for higher pay, and some businesses passed along those costs to customers. And now you have an economy that no longer believes in moderation as it did back in the day – modest wage increases, lower prices and slow growth.

When will it all get back to normal? 

Those who pine for a return to economic certainty and normalcy base their hope  primarily on supply chains catching up and higher interest rates slowing spending. Fed estimates indicate that rates won’t have to rise over 3 percent to restore moderation to inflation and growth.

Current trends such as the U.S. labor shortage, however, could stick around and continue to help drive inflation. While people aren’t flocking back to work, those who are changing jobs are often getting higher wages, and consumer demand could stay high enough to influence companies to increase prices. The fact is that largely as a result of COVID, many people are earning more and spending more.

Even solving supply chain issues could keep prices high. More companies could choose to manufacture domestically, thus reducing globalization, which had kept prices and wages down for many years.

Referencing Fed chairman Jerome Powell’s “perfect storm” comment concerning “disinflationary forces” over the last 25 years, you can apply his description to the two enormous geopolitical events challenging the global economy, and ours, now. On the heels of the pandemic – though there’s no guarantee it will stop kicking, by the way – the mess in Ukraine will continue to roil energy markets and contribute mightily to the levels of volatility we are experiencing.

History is marked by major milestones that changed America’s economy. We are now living in one of those rare times. What “normal” will look like in a few years is about as hard to predict as what’s happened in our world the past two years. But you can expect that this new normal – volatile and nerve-wracking as it is – will stick around a while.

About Tom Siomades, CFA

Tom Siomades (www.aewealthmanagement.com) is chief investment officer for AE Wealth Management, LLC, where he works with his team to provide independent financial advisors solutions to help their clients meet their financial goals. A graduate of the United States Military Academy at West Point, Siomades served as an infantry officer for four years. He earned a master’s degree from Webster University and has more than 30 years of financial industry experience.