A V-Shaped Recovery Is Possible, But That Isn’t All Good News

It’s no secret that the last year was brutal for the stock market and even more draining for personal finances. Between the sharp dive in the markets, production shortages across the board, shipping struggles and more, 2020 was hardly a good year for the financial world. However, aggressive investment by the federal government has suggested that a V-shaped recovery from 2020’s recession could be possible.

Massive federal spending, including direct stimulus checks, cash injections into small businesses, and unemployment benefits, could help buoy a struggling economy. This is good news, in one sense, because a V-shaped recovery—a sharp and sudden return to pre-recession financial markets—means that the least amount of time will be spent with the economy shrinking.

However, there is one boogeyman hiding in the details: inflation. While recession is now at the bottom of most financial experts’ list of woes, inflation is at the top.  “Markets across the board are expensive today, and that is pinned on central bank support,” notes Hugh Gimber, one of J.P. Morgan Asset Management’s strategists. “So, this whole market is very, very sensitive to changes in central bank policy.”

The Looming Threat of Inflation

Inflation rates have remained rather stable over the past twenty years, due in large part to very conservative fiscal policy. The minimum wage hasn’t changed since 2009, wage disparity is at an all-time high and interest rates are remaining low. This means that inflation hasn’t been able to grow like during some parts of the 1970s, when central bank policy drove up interest rates and an energy crisis shifted the national economy into recession.

However, the federal government has dumped cold water on the idea that inflation could be soaring soon, with Treasury Secretary Janet Yellen stating that she found a return to 1970s-style inflation “unlikely” in the modern era.

Investments Shifting

Money managers in the US have begun to shift back toward investing in sectors that took a beating in 2020 due to the unique circumstances of that year. As things in the markets stabilize, the overzealous investments in some sectors, like bleeding-edge technology, has cooled off slightly.

That being said, the markets as a whole are looking healthier than they did this time last year. The swift recovery, bolstered by a new administration and federal spending, could be a blessing for the country. Or, if some investors are to be believed, it could be a precursor to rampant inflation.

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