Down Angle Symbol A symbol in the form of an angle pointing downwards. The S&P 500 has reached record highs this year. Getty Images
- America has gone from a pandemic crash and recession fears to record stock market highs and an economic boom.
- Lockdowns, wars, shortages, inflation, interest rates, day trading and AI have all played a role.
- Here's a look at how we got here – and what might be next.
We have been on a strange journey these past four years.
First there was a deadly pandemic that crashed financial markets and sent the economy reeling, then there was soaring inflation and rising interest rates that squeezed households and threw industries into turmoil, and now the stock market is on the upswing Record highs and no recession in sight.
So how did we get here—and what lies ahead for the U.S. economy in 2024?
Go viral
The COVID-19 pandemic broke out in early 2020 and led to widespread lockdowns, travel restrictions and business closures.
Global supply chains quickly became unstable due to mass closures in countries like China, delivery delays, congested ports, labor shortages and other problems caused by the virus and measures to contain its spread.
Frightened investors dumped their stocks in droves, sending the S&P 500 down by a third in just over a month. The closure of large parts of the economy caused GDP to contract by 8% in a single quarter. Unemployment rose from 3.5% to almost 15% and remained above 10% for four months in a row.
The Federal Reserve rushed to support the economy by cutting its key interest rate from above 1.5% to between zero and 0.25%. Bond purchases were also expanded to inject more money into the economy.
Likewise, the U.S. government sought help by sending stimulus checks to households, providing generous loans and grants to struggling businesses, and launching a series of emergency spending programs.
The panic on Wall Street quickly subsided and institutions rushed to snap up bargains. There has also been an explosion in day trading that has continued throughout 2021, fueled by people stuck at home with limited leisure options but stimulus checks to spend, as well as the rise of commission-free trading apps like Robinhood and Forums like WallStreetBets that encourage risky trading trading for entertainment value.
The result was that casual investors flocked to meme stocks, cryptocurrencies, special purpose acquisition companies (SPACs), and other highly speculative assets.
Some wanted to make money quickly. Others were eager to poke fun at hedge funds and the like, or to bail out GameStop, AMC Entertainment and other deeply loss-making companies they fondly remembered from their childhood.
AMC and GameStop were two meme stocks. Noam Galai/SOPA/Getty Images
Many Americans have also been saving money during the pandemic to save on expenses like travel and live entertainment.
War, prices and tariffs
Fast forward to spring 2022, when Russia's invasion of Ukraine unleashed a new shock on global supply chains and led to a spike in prices for essential goods such as food and energy.
Demand triggered by economic stimulus as well as supply disruptions caused by the pandemic and war caused inflation to rise to a 40-year high of 9.1% in June of that year.
The Fed quickly raised interest rates to curb price increases, increasing them from virtually zero to over 5% in less than 18 months. She hasn't touched them since.
Higher interest rates typically curb spending, investment and hiring, which can lead to a spike in unemployment and a slowdown in the economy so severe that it leads to a recession.
They also tend to drive down the prices of risky assets such as stocks and real estate. That's because they boost the ultra-safe returns of Treasury bonds and savings accounts, prompting investors to trade potential returns for a guaranteed payday.
Financial pain is increasing
American households faced a double whammy as inflation rose: rising food, fuel and housing costs, as well as rising monthly payments on their mortgages, auto loans, credit cards and other debts as interest rates rose.
As a result, they began breaking down their pandemic nest eggs, racking up record amounts of credit card debt and putting less money away each month.
This trend threatened to cause consumers to run out of cash and spend less on goods and services. At the same time, companies struggled with higher interest payments on their debts, cost inflation, labor shortages and other problems.
The housing market also stalled last year after mortgage rates rose above 7% for the first time in more than two decades. Potential sellers held off on listing their homes because they didn't want to miss out on the low interest rates they had secured. Potential buyers balked at paying top dollar for a home and making a much higher monthly payment than they expected.
Silicon Valley Bank was one of several smaller lenders caught off guard by interest rate hikes last spring, leading to large paper losses in its portfolio of bonds and mortgages.
Depositors, spooked by the declines and fearful of losing their money, frantically withdrew their cash, causing the banks to collapse and prompting the federal government to take them over and guarantee their deposits.
Higher tax rates coupled with the shift to remote work have also reduced the value of offices and other commercial properties.
The industry now faces a triple threat: falling property values, a credit crunch as struggling regional banks pull out of financing the sector, and onerous interest payments for debt-dependent developers willing to refinance at much higher interest rates.
Defy the prophets of doom
Despite all these headwinds, the U.S. economy grew a solid 3.3% annualized last quarter, unemployment remained at a historic low of 3.7% in January, and inflation has fallen below 4% in recent months.
Consumer spending and corporate profits have also held up, defying concerns of a decline in demand and a recession in profits.
There is also great excitement about AI's potential to increase productivity. Additionally, the Fed has signaled it will move to cut interest rates this year to ease pressure on sectors like banking and real estate while reducing the risk of a recession.
Against this rosy backdrop, it's no wonder the S&P 500 is up 5% this year to a record high of over 5,000 points after rising 24% in 2023.
It's still unclear why exactly America appears to be doing so well while other countries like the United Kingdom are facing more stubborn inflation and have slipped into recession.
The price increase may actually have been temporary, a result of the pandemic boosting demand for goods at a time when supply chains were unable to deliver them.
Or inflation could be the result of an increase in the money supply, and its decline over the last year has created the conditions for an economic downturn.
Massive government spending in the form of stimulus packages, student debt relief, and infrastructure and technology programs may have boosted growth and employment and prevented a recession.
Advances in AI could have multiplied the value of Magnificent Seven stocks and pushed the entire market higher, or the technology could be overkill and a bubble is doomed to burst.
In short, everything could go well and the good times will just continue. Alternatively, years of hype, speculation, and irrational exuberance, combined with unsustainable spending and borrowing in both the private and public sectors, are causing the stock market and economy to spiral into disaster.
Although no one can be sure what is coming, understanding how we got here can help us understand the potential risks that lie ahead.
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