A Shot in the Arm for Stocks

Please note: This update was prepared on Friday, March 19, 2021, before the market’s close.

News of faster-than-expected vaccine distribution in the U.S. and the Federal Reserve’s pledge to keep rates near zero through 2023 were a shot in the arm for stocks this week. But inflation fears resurfaced, driving Treasury yields up and sparking a tech stock sell-off.

Lagging tech shares are one reason the past few years’ status quo has flipped and the S&P 500 index is trailing the Dow Jones Industrial Average in 2021. On a total return basis, the Dow is up 7.9% for the year through Thursday, while the broader S&P index has gained 4.6%. The MSCI EAFE index, a measure of developed international stock markets, has returned 5.0%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.62%, up from 1.51% last week and 1.12% at the end of 2020. The U.S. bond market has declined 3.7% this year.

Fed Steady; Inflation Concerns Persist

We often say that markets move on earnings and interest rates; everything else is noise. Well, interest rates were front and center this week, as the Fed once again made a commitment to stay the lower-for-longer course. That didn’t fully calm bond traders, who sent the yield on the benchmark 10-year Treasury to 1.74% on Thursday—a brief return to pre-pandemic levels.

Why are bond market denizens seemingly ignoring the tried and true aphorism, “Don’t fight the Fed?” In part, they’re concerned that a recovering economy, flush with stimulus cash, will spur rising inflation, possibly even forcing policymakers’ hands.

But are these inflation concerns warranted?

While we expect inflation rates to increase as the year rolls on, we are not convinced that a post-pandemic inflation spike will persist and stymie long-term economic growth. Yes, there are some temporary supply chain issues that are causing price distortions, but we aren’t seeing sharp, widespread, growth-choking inflation. Plus, with the job market still in a fitful recovery—new claims for unemployment benefits rose slightly last week after several weeks of decline—we think bracing ourselves for inflationary times is getting ahead of where we are (and where we are headed).

Rather than a negative, inflation is good for businesses and investors so long as it doesn’t overheat. For one thing, it reduces the impact of long-term debt on both companies and the economy. For another, it’s an indicator of growth rather than contraction. And, over the long run, owning businesses with growing earnings and cash flows has been one of the best ways to protect against inflation—so a diversified portfolio already has some inflation defense built in.

Robust Economic Growth? Wait and Watch

The Dow and the S&P 500 indexes both hit multiple record highs this week. And why not? Shots are reaching arms, businesses are reopening their doors and $1.9 trillion in fiscal stimulus is being injected into the economy.

Does this mean economic growth is about to go gangbusters? Well, maybe down the road. But economists’ expectations for first-quarter growth, so lofty just a month ago, are quietly being rolled back to a more modest level.

The Federal Reserve banks and companies like Moody’s keep tabs on all kinds of economic indicators, some of which are reported monthly and others much more often. Based on the data, their high-frequency models for economic growth have been getting less optimistic as March rolls on.

The Atlanta Fed, for instance, was predicting in late February that the economy would grow at an annualized 9.6% rate and they ratcheted that up to 10% in early March. But, just yesterday, their estimate came in at 5.7%. That’s a major revision—suggesting that growth would be 1.4%, quarter over quarter, rather than 2.4%. They’re not alone. Moody’s took its estimate down from an annualized 8.1% rate to 6.4% over the past week—it had been as high as 9.0% in February.

Why is this important? It’s simple: Economic growth ultimately drives profit growth. If companies see good profit growth, then today’s stock valuations—and record-high stock prices—may not be unreasonable. Without a robust economic recovery, the market’s road ahead will be more challenging.

Federal Tax Deadline Extended

The Internal Revenue Service (IRS) announced Wednesday that it is extending the 2020 federal income tax filing deadline from April 15 to May 17, 2021 for individuals.

But before you hang up your green eyeshade and put your tax forms back in your “to do” pile, be aware that the extension doesn’t apply to everyone.

As of this writing, the IRS announcement applies only to complete 2020 tax returns. If you file quarterly estimated taxes, well, your deadline has not been extended, and the first payment for 2021 is still due April 15.

If you’re planning to take advantage of the extension, be sure to find out if your state has followed suit. Many states have yet to issue guidance in response to the IRS’ announcement and may still require you to file your state tax return by April’s deadline.

We expect the IRS to issue further guidance in the days to come. Be sure to reach out to a tax professional if you have questions about your taxes.

Financial Planning Focus:

Financial Planning in Your 50s

Raising a family and building your career is enough to keep most people plenty busy—so much so that many don’t take financial planning seriously until their 50s, when they first see their retirement horizon approaching.

If you are in your 50s, here are five tips to make sure that you’re preparing properly for that next big financial milestone. (If you’re not in your 50s, check out our previous entries on tips for your 20s, 30s, 40s or your 60s.)

1. Understand your spending. Most everyone knows (or can quickly calculate) how much they earn. Fewer people have a handle on what they’re spending. Knowing what it takes to maintain your lifestyle informs the rest of your financial plan. We’ve found that how a client spends is one of the most important factors in determining whether they will succeed or fail in reaching their retirement objectives. As a first step, take a look at our Budget Worksheet to figure out your monthly cash flow.
2. Continue investing for the long haul. It’s tempting to think about making your portfolio more conservative as your 60s start coming into view, but keep in mind that you will likely need your nest egg to last another 20 to 30 years or more. While everyone’s risk comfort zone is different—and there’s never any need to take wild risks—growing your portfolio faster than inflation should still be your primary goal. Historically, that’s required an investment in stocks.
3. Play catch-up. Turning 50 means you’re eligible to make catch-up contributions to your retirement accounts. If you turn 50 this calendar year, you can contribute up to $26,000 to your 401(k)—the $19,500 standard limit plus a catch-up contribution of up to $6,500—for 2021. Additionally, you can make catch-up contributions of $1,000 each to your health savings accounts (HSAs) and individual retirement accounts (IRAs). (And remember, you have until April 15, 2021 to make those HSA and IRA contributions for 2020—the IRS has yet to issue guidance on whether this deadline will be extended to May 17 along with the federal tax filing due date.)
4. Consider long-term care. It isn’t pleasant to think about, but the reality is that half of people turning 65 today will require long-term care. If you’d feel better having long-term care insurance, the best time to purchase a policy is typically in one’s late 50s, before premiums begin shooting higher.
5. What’s your retirement vision? Now’s a good time to start reflecting on what retirement means to you. Do you want to move somewhere warmer? Make time for volunteer work? Wear out your hammock or keep your hand in your profession through consulting? Don’t forget to include your spouse, partner or other loved ones in your planning.

These five tips apply to most anyone in their 50s. But it’s also important to recognize that your situation is unique—make sure that your financial plan reflects your priorities.

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

No trades this week. 

AIQ Tactical Global Growth

Sold iShares Core MSCI Emerging Markets ETF (IEMG). Bought iShares MSCI Eurozone ETF (EZU).

AIQ Tactical Defensive Growth

Bought iShares Core S&P 500 ETF (IVV) with cash.

AIQ Tactical Multi-Asset Income

Sold iShares 1-3 Year International Treasury Bond ETF (ISHG), with Proceeds to cash.

AIQ Tactical High Income

No trades this week.

Adviser Investments’ Market Takeaways

You can find two new Market Takeaways videos on our website. Research Analyst Liz Laprade talked about the investment potential of non-fungible tokens (NFTs) while Vice President Steve Johnson tackled the often-intimidating bond market.

Looking Ahead

A solid slate of economic reports are due next week, with data expected on new and existing home sales, durable goods and capital goods orders, manufacturing and service sector activity, fourth-quarter GDP and inflation, as well as a bevy of reports on consumers, with takes on their personal income, spending, savings and sentiment.

As always, you can visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.