5 Most Important Secret About 2021 Market Bubble No One Told You


Although the stock market is at its all-time high, many analysts believe there is still more room to go. Regardless of the inflation rate and the level of market correction, this year is defined to be a bull market for five good reasons.


1. 2020 Pandemic Effect on Labor Market

In April 2020, the unemployment rate reached 14.8%. It was the highest unemployment rate the U.S experienced since October 2009. As of July 2021, the unemployment rate dropped to 5.4%. Which was the closest to 4.4% of Mars 2020 unemployment rate. All above all prediction, it is important to remember a stock market correction can still be possible. However, any significant market correction could increase the unemployment rate, which could be very devastating for the post-pandemic recovery.

It is also important to point out that the U.S is facing a risk of going from cyclical unemployment to structure unemployment, while many Americans are changing industry and career paths. Through the support of the U.S government, many companies might have been listing job openings; but they couldn't find the right talent for many positions.

2020 Pandemic allowed many people who lost their job to think about their career paths. Generally speaking, any significant market correction will put the payroll and unemployment rate at risk in the U.S. It will be an event the U.S government cannot afford to leave on the table at this moment.


2. Raise of Salary Along with the Rent

Since the end of 2020, many companies have started to increase their employees' salary. However, any salary increase will increase the fixed cost of the company.

The purpose of salary increase by many employers was to beat inflation and attract the best talents. Regardless of the reason, inflation is here to stay. In light of this awakening, the landlords will never decrease the rent despite the rate reduction by the Federal Reserve. People are facing a higher cost of living without changing cities because of the inflation and unemployment rate.

According to the U.S Bureau of Labor Statistics, the inflation rate or consumer price index (CPI) was 5.5% from July 2020 - July 2021. Companies had increased their costs accordingly to beat the inflation rate and meet shareholders' expectations. One thing is for sure, companies are not willing to reduce the price of their finished good, and landlords are not willing to lower their rent.

This economic situation makes many employees review their financial priorities and career path. To put in another way, a raise in employees’ salaries by 5% might not be good enough to meet their purchasing power.

In fact, another bear market might increase companies' fixed costs again. As a result, they will have to raise the price of their products.

For instance, on August 19, 2020, Microsoft announced an increase in its Microsoft 365 Office which will take effect on March 1, 2022. Microsoft will increase its products by 8% - 25% to meet its production cost. The news was welcomed by an increase of the stock price by about 5% in two days.

3. Inflation from Main Street to Wall Street

The main street is not the only one affected by inflation. Inflation is already being incorporated into the prices of many stocks. Removing all other factors, one analyzed the book value of the top 4 companies in the U.S with an inflation rate of 5.5%.

Companies

These companies are also the most weighted companies of Dow Jones, Nasdaq, and S&P 500. With a stock price being at an all-time high, some of these companies’ book value still did not beat the inflation rate since the beginning of the year.


4. Global Market Weight on US Economy

As of January 2021, U.S represented 55.9% of the world stock market and the most liquid market. In addition, U.S is also the largest importer of goods and services in the world. Consequently, U.S inflation has a cause and effect on world trade. While the dollar is weakening, other countries are also experiencing the devaluation of their currency.

Another key point is the U.S recession on the global economy. Each and every economic recession in the U.S had affected the world who relies on U.S imports, exports, and stocks market to optimize the global trade agreement. Rather than focusing on the U.S stock market is at its all-time high, and the Federal Reserve using its tools to support the economy. We should reflect on what exactly does U.S market crash of this year means for the global market after facing the recession of 2020.


5. Historical Data of the Market from September to December

Dr. Yardeni's research showed that September is the worst month of the year for the S&P 500 since 1928. From 1928 to 2020, S&P 500 (September) lost is 50 over 42 gains. October is earning month where the stock market moves based on the major companies' revenue and estimate.



Although, S&P 500 does not represent the Dow Jones or Nasdaq. It still represents the top 500 companies that represent the U.S stock market. One point often overlooked is that S&P 500 closes on a positive note in November and December. Nonetheless, one can consider 1 bad month out of the 4 months for the best, or 2 bad months out of the 4 months for worst.

In fact, investors still have full attention on the Federal Reserve supporting the economy until the end of the year. A 20% correction of the S&P 500 at the closing price of 4535.43 on September 3, 2021, equal 3628.34. In other words, S&P 500 will be at the price of December 2020. It is essential to outline that the average return of the S&P 500 after the election is 13.8% with a Democratic President, Democratic Senate, and Republican House.

In conclusion, the high inflation rate, global economic support, low unemployment rate, historical data of the month lean toward a bullish market for 2021.


Note: The market is unpredictable, involves significant risk, and it is not suitable for all investors. An investor must talk to a financial advisor before any investment. This article reflects only the opinion of the writer and it is not investment advice.

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