Mar 26, 2021 4 min read

It was a year ago when the Dow reached the bottom of its plunge because of the COVID-19 pandemic. The average dropped from its mid-February high by 34%!

This was the fastest decline in history and temporarily stopped an 11-year bull market. Then it took only six months to match the February high, and the Dow is now up 75% from the bottom.

Both are very unusual facts, which may have some people believing the stock market can move in only one direction. History tells a different story. One way to describe the market might be walking up stairs while playing with a yo-yo. The general direction is upward, although there are a number of up and down cycles.

If your timeline is long enough, the stock market often produces the biggest returns. If you need to withdraw money during a downward cycle, there may be problems.

The rapid recovery and rise after the pandemic started was caused by an unprecedented amount of fiscal and monetary stimulus. The Federal Reserve cut already historically low interest rates to near zero. It promised to ignore inflation and support the corporate debt market, and it made an almost unlimited amount of liquidity available.

Congress spent massive amounts of money that it did not possess to jump start the virus-fueled economic shutdowns. There have now been three direct-to-citizen cash stimulus, and trillions of dollars of other spending, on many things not even related to the virus that continue even though the economy is growing. How long can this artificial environment last?

Now we are being told that the almost $2 trillion spent on just the last stimulus package is not enough and we should spend another $3 trillion on infrastructure. If we ran our households like this, we would all be bankrupt. To see how fast the debt is growing, visit usdebtclock.org. Scary!

We are now hearing cries to raise taxes on the rich. The problem is there are just not enough people in this group. The place that is the real target, and where the money just happens to be, is IRAs and 401(k)s. That is the only place for Washington to find the money. Taxes will go up, but not only for the rich.

Inflation has to pick up dramatically at some point. We are already seeing this in gasoline and lumber prices. Anyone who goes shopping seems to see more inflation than official statistics. As inflation increases, the Fed will have no choice but to raise interest rates. This will not be beneficial to an already high valuation stock market.

We need to reward good financial behavior. Those who saved paid taxes and paid their debts. Most people did not borrow from the government or paid back loans as promised. I often hear from people, “should I keep paying and be penalized when others don’t?” That is a legitimate question.

Modern medicine is overcoming the tragic year that was 2020. That government spending was necessary and prudent. We developed vaccines in record time and secured the supplies necessary. We can see the end of the tunnel, although we are not quite there.

America is the strongest country in the world, but we need to make intelligent decisions and not pretend that we don’t have to pay the piper someday soon. Reward good behavior, not bad. Realize that inflation and taxes must go up. The stock market will have a longer-term bear market at some point.

You worked hard all of your life for retirement. Make sure that you are ready for what could be the perfect storm.

Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.