Has U.S. Inflation Peaked?

Has U.S. Inflation Peaked?

First-quarter earnings reports, along with improved consumer sentiment, were an early Easter egg for investors this week, arriving in time to temper the latest inflation report.

Overall, the earnings news was solid enough to break a three-day losing streak for the S&P 500 and the NASDAQ on Wednesday, with travel stocks rallying on the back of strong numbers from Delta Airlines. Corporate earnings are under more scrutiny than usual this quarter as investors and analysts look for clues to how well companies are managing inflationary pressures.

We expect to see some cracks in corporate facades mixed with strong results and forecasts. JPMorgan Chase, the nation’s biggest bank, reported lackluster results and surprised shareholders with plans to stash $900 million in credit reserves as a cushion against possible economic turmoil (read: recession) ahead. Chairman Jamie Dimon warned that inflation is a threat to the economy, though he said recession is “far from a sure thing.”

Meanwhile, Amazon, which has yet to report, announced it’s responding to inflation by raising fees for its partner firms. The mega online retailer revealed this week that it will begin charging a 5% fuel and inflation fee to sellers who rely on its platform for shipping services. That’s after a 5.2% surcharge imposed on Amazon merchants back in November.

Clearly, companies in different businesses are reacting to the threat of prolonged inflation and the potential for recession in very different ways. Please join us for our analysis of how the nation’s megafirms are grappling with inflationary challenges and much more in our quarterly webinar next week.

Where Consumer Prices Are Headed Next

Wall Street traders’ focus this week was on the latest inflation numbers and their potential impact on the Fed’s rate-hike plans. And the 8.5% annualized increase in the consumer price index (CPI) certainly got their attention.

Despite the highest headline inflation figure since 1981, there’s another way to look at this: Core inflation, which excludes volatile food and energy prices, rose only 0.3% in March from the previous month (compared to the 1.2% month-over-month rise for the CPI), the slowest pace since September 2021.

One sign that the inflation wave may have crested is used car prices, which have been on a tear—up 24.8% from a year ago. Prices declined 3.3% in March. While prices are still high, they may be on their way back down.

Of course, if we’ve reached peak inflation, that doesn’t mean consumer prices will quickly decline. Ongoing supply chain kinks and the war in Ukraine will continue to put upward pressure on prices. Plus, even if those factors ease and costs for suppliers go down, that doesn’t mean sellers will automatically lower prices for you and me. Prices may not rise at the pace they have been lately, but price cuts aren’t on the horizon either.

As always, if inflation concerns have you worried about your financial plan, retirement spending strategy or the way your investments are aligned, we’re only a phone call away and are always happy to talk with you.

Why So Much Interest in I Bonds?

I Bonds won’t cure high inflation or reduce volatility in the stock market, but they have become a popular portfolio component of late. You just have to keep their limitations in mind.

Here’s a quick primer:

Like plain-vanilla Treasury bonds, Series I U.S. Savings Bonds (I Bonds) are backed by the full faith and guarantee of the U.S. government. Their special sauce is that the income they earn is indexed to inflation.

At the moment, I Bonds are offering an impressive guaranteed 7.1% interest rate. With interest rates adjusted semiannually (on May 1 and Nov. 1) and inflation on the rise, the amount of income I Bonds pay is set to go even higher.

A bond, backed by the U.S. government, paying over 7%—which is more than junk bonds currently—and set to rise? Back up the truck!

But keep a few things in mind.

I Bonds come with some strings attached. The biggie: Investments are capped at $10,000 a year per person ($20,000 for married couples) with an additional $5,000 available if you use your tax refund for the purchase (and are willing to hold them in paper, not electronic, form).

Plus, with the inflation component of the bond’s interest reset every six months, the salad days of 7% and greater yields are unlikely to last as your bonds age and inflation is wrestled to the mat.

Two other factors to be aware of:

First, you can’t redeem your bonds in the first 12 months after purchase. And if you sell before the bond is five years old, you’ll lose the last three months of interest.

Second, you can only purchase I Bonds in electronic form through the government’s web portal, TreasuryDirect. That means these assets can’t be managed as part of your Adviser Investments portfolio.

Despite the limitations, guaranteed returns that can hang close to inflation are nothing to shake a stick at. Let us know if you’d like to learn more. We’d be happy to help you make an investment.

Chart of the Week: How Stocks Perform During Recessions

Director of Research Jeff DeMaso:

We’ve mentioned why we think it’s too soon to make the call about a recession—and nothing has changed on that front. But since the topic is trending in the headlines, I took a shot at creating a stock market road map based on the historical record.

Over the past 65 years, we’ve experienced 10 economic recessions in America—and no two have looked alike. Some have been mild and others severe. Some recessions ended in the blink of an eye (two months was the shortest) and others dragged on and on (18 months was the longest). And complicating matters from an investor’s perspective, the stock market has responded differently during each recession.

But how did stocks perform on average during economic downturns?

Given the wildly different lengths of past recessions, I tried to standardize them by putting them on the same time scale to give us a “percent complete” yardstick. In the chart below, 0% is the start of the recession, 50% is the middle and 100% is the end. The light blue area defines the upper and lower bounds of stock market performance at each step along the way. At the midway point (50%) of past recessions, the S&P 500’s return has ranged from -19% (1970) to 4% (2001).

On average, stocks were down 11% at the midway point of each recession. While economic downturns clearly aren’t good for the stock market, I’ll bet that an average 11% decline halfway through a recession is milder than most investors would have guessed.

I did find one shared characteristic of the market’s performance in every period I analyzed: In every one of the 10 recessions we’ve experienced over the past 65 years, stocks bottomed and began rallying before the recession was over. On average, stocks bottomed at the 60% point. Pinpointing that “60% over” mark in real time is a challenge (to say the least), but this stat argues for maintaining stock exposure during recessions; if you wait until the “all-clear,” you’ll have missed out on the initial market rebound.

Note: Chart shows range of performance for the S&P 500 index (excluding reinvested dividends) along with the average return during prior 10 recessions (8/1957–4/1958, 4/1960–2/1961, 12/1969–11/1970, 11/1973–3/1975, 1/1980–7/1980, 7/1981–11/1982, 7/1990–3/1991, 3/2001–11/2001, 12/2007–6/2009, 2/2020–4/2020), rescaled to a “percent complete” timeline. Sources: National Bureau of Economic Research, S&P Dow Jones Indices, Adviser Investments.

Financial Planning Friday
Live Where the Taxes Are Low

With home prices at their peak, it pays to factor other financial benefits into your relocation plan. Whether you’re downsizing your footprint, thinking about working remotely, or moving closer to your kids or grandkids, don’t forget that there are tax advantages to claim if you move to a lower-tax state.

Here are five things to keep in mind to reap the benefits of a new ZIP code:

  1. Establish domicile. From a tax perspective, domicile and residence are two separate concepts. You can own multiple residences, but you can only have one domicile—and it’s your domicile that determines where you owe taxes. Simply owning property in a state is not enough. While states’ laws on establishing domicile vary, there are two rules that generally apply. First, your domicile must be your principal and permanent place of residence. Second, you must intend to return to and remain in that residence for an indefinite period.
  2. Show intent. How do you prove to Uncle Sam that you intend to stick around in your new home? Here are some convincing specifics:
    • You’re registered to vote there
    • You have a network of local professionals (e.g., doctors, dentists, accountants)
    • Your driver’s license and vehicles are registered there
    • Your family heirlooms and other valuables are kept there
    • You’ve joined local social organizations
    • You have a gym membership
  1. Track time spent. You must spend over half of the year (183 days) at your new home for it to qualify as your principal residence. In case your tax filing triggers a residency audit, keep track of receipts, travel charges, flight and cell phone records, etc., to prove you were living in your desired domicile for most of the year.
  2. Sever ties to your previous domicile. To strengthen your case, it’s wise to minimize ties with your old home. The easiest way to do that is to sell any real estate you own there. Or, if you plan to hold on to multiple homes, try to keep a low profile there for at least a few years. The tips listed above also work in reverse: Cancel your old gym memberships, close bank accounts, and sever affiliations to clubs or organizations to help make the case that you are no longer a permanent resident.
  3. File appropriately and update your financial plan. Once you’ve established your new domicile, make sure to file your federal income tax return using your new address. Depending on the state, you may also need to file a Declaration of Domicile document. And remember to keep your network of financial professionals in the loop. In particular, work with your attorney or adviser to update your estate plan to reflect new state laws.

As you can see from the above, establishing domicile in a new state isn’t easy. The IRS wants to be sure you have every intention of making this your new home. If you have any questions about your situation, please reach out to us. We are happy to help. After all, we are The Planner You Can Talk To.

Register Now for Our Quarterly Webinar: Stocks, Bonds and the Fog of War—Our Investment Perspective

Join us on Wednesday, April 20, from 4:30 p.m. to 5:30 p.m. EDT for our next quarterly webinar, Stocks, Bonds and the Fog of War—Our Investment Perspective, as our investment strategists explain how we got here and what the rest of 2022 may have in store—including what we’re doing to help our clients navigate the ongoing market volatility.

Chairman Dan Wiener, Director of Research Jeff DeMaso and Chief Investment Officer Jim Lowell, among others, will discuss the current market environment and their outlook for the months ahead. In addition to a market recap and commentary, this interactive webinar will allow our team to answer your questions and discuss your concerns. Click here to register now!

Adviser Investments in the Media

This week, Barron’s wrote about Adviser Investments’ acquisition of Polaris Wealth Advisory Group and how the deal will leverage each organization’s strengths to deliver additional services to our valued clients. Elsewhere, Chairman Dan Wiener and Director of Research Jeff DeMaso spoke to RIABiz and Ignites, respectively, about Vanguard’s new collaboration with American Express.

On the airwaves, Chief Investment Officer Jim Lowell appeared on CNBC World to discuss the economic costs of interest-rate hikes, while Portfolio Manager Adam Johnson spoke to Fox Business about the upside of negative sentiment.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade discussed the relevance of buzz from the recent bitcoin conference, while Portfolio Manager Steve Johnson offered his thoughts on why talking heads are bad medicine for portfolio management.

Ask Us a Question!

We’re always interested in the topics or concerns you might like us to comment on. As much as we try to cover the investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question about investing, the markets or financial planning and one of Adviser Investments’ experts will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Looking Ahead

Adviser Investments’ offices and the markets will be closed tomorrow in observance of Good Friday; we wish those celebrating a happy Easter and a joyful Passover. We’ll be back at our desks Monday morning ready to help you.

Next week will bring key reads on housing (building permits, new construction, existing home sales and a home builders survey), manufacturing and the service sector, and leading economic indicators, in addition to the Federal Reserve’s “Beige Book” of anecdotal reports from around the country.

As always, please 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 managementfinancial and tax planningmanaged 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.

Please note: This update was prepared on Thursday, April 14, 2022, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein—including but not limited to the Your Question Answered section—should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities.

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