Is Inflation Forcing the Fed’s Hand?

Inflation: Forcing the Fed’s Hand

Omicron was the watchword on Wall Street again this week—whether stocks were up or down. On Tuesday, a headline in The Wall Street Journal attributed stock market gains to “Omicron Optimism.” On Thursday, after markets gave up some ground, the paper blamed “Omicron Restrictions.”

The S&P 500 has mostly recovered the ground it lost in its post-Thanksgiving omicron sell-off, but stock markets have vacillated based on daily (or hourly) developments—up on hopes that the variant is less fatal than feared; down on evidence of increased transmissibility; up on news that vaccines are effective against it; down on concerns of heightened precautions this winter.

But this morning’s inflation report means attention will turn from the coronavirus to the Federal Reserve in the coming week. Policymakers have been hinting that high inflation may prompt them to wind down stimulus efforts sooner than anticipated. And today’s consumer price index (CPI) reading may force the central bank’s hand. The index rose 0.8% in November, meaning prices have increased 6.8% over the last 12 months—the fastest pace since 1982.

In sum, there are plenty of events to monitor but none should overshadow the economic fundamentals and medical developments that continue to support rebounding themes and steady economic improvement.

All Eyes on the Fed

Federal Reserve policymakers have some difficult decisions to make.

On the one hand, they want to foster further economic gains because all is not right in the labor market. Yes, the unemployment rate has dropped all the way to 4.2%, but look below the surface and you’ll see that nearly 4 million people who were employed before the pandemic are still not working today. That signals a need to keep interest rates low and stimulus flowing.

On the other hand, as we noted above, prices are rising at a pace we haven’t seen in a generation.

Does the Fed fight inflation head-on, cut stimulus faster, raise interest rates sooner and risk overturning the economic recovery? Or do they bank on inflation moderating of its own accord as kinks in the supply chain begin to get straightened out? There’s no easy answer.

At the moment, it appears that Fed officials are increasingly worried that they’ll have to pick up the pace of change if they hope to rein in inflation. You’d think the prospect of the central bank hiking interest rates would lead to rising bond yields. But no, bond yields have been falling (and hence prices have been rising). Why? It seems bond traders are concerned that the Fed will go too far in its fight against inflation and push us into a recession.

The ‘S&P 6’ Index

The six largest companies in the S&P 500—Amazon, Alphabet (aka Google), Apple, Meta (aka Facebook), Microsoft and Tesla—make up slightly more than 25% of the index’s market cap. Their combined size exceeds the GDP of every country in the world except the two largest—the U.S. and China.

The stock market benchmark is up an astonishing 26% year-to-date; yet, without a handful of billion-dollar behemoths, the S&P 500’s return this year would look very different. Literally hundreds of companies in the S&P 500 are down 10%, 20% and more from their highs while the S&P 500 is fractionally below its November peak.

The same goes for the NASDAQ Composite index, also up more than 20% in 2021. Remove the five largest stocks and the index is down 20%.

Our point, which pains us, is that diversification hasn’t been a benchmark-beating strategy in 2021. If you’ve owned anything other than the mega-techs, you’ve probably trailed the headline S&P 500. (As a side note, the smartest portfolio builders at Vanguard have generated returns of just half the S&P’s this year with their version of a diversified portfolio.)

No one predicted that this was how the markets were going to work coming out of the pandemic’s depths. And we don’t think the market can continue on this path forever.

What we can predict is that, ultimately, a diversified portfolio will prove profitable over time. Almost by definition, there will be periods when diversification is left in the dust by this or that portfolio, fund or index. But if we’ve learned anything in our many years of managing wealth, it’s that you can’t argue with history.

Stay invested. Stay diversified. Stick to your financial and investment plans. And if you’re concerned about your spending in retirement, read on.

Is the 4% Retirement Spending Rule Obsolete?

This week’s reader question is about retirement spending:

 Is the classic 4% rule still valid and how should I factor inflation into my retirement spending budget?

Andrew Busa Manager of Financial Planning Andrew Busa had this to say:

Maybe, and yes.

This ubiquitous retirement spending maxim, the “4% rule,” came into vogue in the 1990s. The financial planner who created it, William Bengen, examined historical returns from the stock and bond markets and applied them to a diversified portfolio to determine the percentage a retiree could prudently withdraw from their retirement accounts over time. In all of the market scenarios he studied, including the ugliest, withdrawing 4% annually from his hypothetical portfolio meant never running out of money over any 30-year time horizon.

More recently, the solidity of the 4% rule has been challenged, with pundits asking whether rising inflation combined with lower bond yields means a 4% withdrawal can still work for retirees today.

On the surface, the 4% rule is appealing in its simplicity—in combination with a good long-term investment plan, it could see you through retirement. But even Bengen admits that his rule is too general to be considered gospel. We agree. This rule of thumb—like many others—was never intended to be an absolute for every person’s financial plan.

Retirees have quite a few spending regimens and solutions to consider: Monte Carlo simulations use a predictive model to project the likelihood of achieving retirement goals at various withdrawal rates. The bucket method divides assets into three categories (cash, bonds and stocks) and aligns your withdrawal rate with your retirement horizon and risk appetite. And so on.

Like all helpful guidelines in the financial planning playbook, retirement spending needs to be tailored and adjusted to each individual’s situation. The key is to stay invested in an appropriate mix of assets throughout one’s retirement.

The desire to switch to what is probably a too-conservative portfolio is understandable, since retirees are often more interested in a return of their money than a return on their money. However, the retirement timeline is lengthy. You may be retired for as long as you were employed! As a result, you need that money to be working for you, compounding and earning a solid rate of return over time to ensure you don’t run out of gas.

As far as inflation’s impact, we know it can be a challenge when it rises quickly, especially if it throws a fixed budget out of whack. We don’t think the current inflation rate is sustainable; regardless, please don’t hesitate to call us if you have any concerns about your ability to maintain your lifestyle—my team of financial planners is ready, willing and able to help set you on the proper course and put your mind at ease.

 Chart of the Week: Investors Are Buying the Dip

We monitor a wide range of data to form our outlook on the market and the broader economy—here’s one indicator our analysts have found enlightening or curious.

Director of Research Jeff DeMaso By Director of Research Jeff DeMaso

Buy low, sell high. It sounds easy, but it’s not. Investors pulled money out of stock mutual funds and ETFs in 22 out of 24 months in 2019 and 2020. They only returned to the market this past year.

For investors that may have missed the initial market recovery from the pandemic bear market, the lesson learned is “buy the dips.” As stocks fell in the week after Thanksgiving due to the spread of the omicron variant, investors bought over $14 billion worth of stock mutual funds and ETFs (according to estimates from the Investment Company Institute).

Buy Dip Omicron
Note: Chart shows equity mutual fund and exchange-traded fund (ETF) flows on a monthly basis from 1/1/2019 through 10/30/2021. Flow data for Nov. 2021 is based on weekly estimated flows. Data for the S&P 500 index is price-only (excluding dividends) from 1/1/2019 through 12/8/2021. Sources: Morningstar, Investment Company Institute.

Financial Planning Friday
Planning for 40-Somethings

You’re well established in your career and hopefully earning more than you spend. You may have your own family as well as aging parents to look out for. On top of that, retirement has crept a decade closer. That’s a lot to manage—and financial planning can help. Here are five tips to strengthen your financial foundation during your 40s:

  1. Protect yourself with insurance. You can’t put a price on peace of mind. Disability insurance can help protect your income if you are unable to work. Life insurance can help provide for your loved ones if you pass away. Health insurance is an absolute necessity. If you own a house, homeowner’s insurance is another essential. And consider a personal umbrella liability policy that is roughly equal to your increasing net worth.
  2. Focus on retirement savings. If you don’t already, begin contributing at least 10% of your pre-tax income (or up to the annual limits if you can afford it) to your retirement savings accounts (e.g., 401(k), IRA, etc.) right away. Yes, you can include employer contributions, if any, in your tally. Consider bumping up your contribution percentage every time you receive a raise.
  3. Invest outside of retirement accounts. In addition to participating in your employer-sponsored retirement plan, consider opening a brokerage account to grow your savings above what you’d earn in interest with a bank account. If you have children, give us a call about setting up a 529 plan to prepare for their future educational expenses.
  4. Talk to your parents about finances. Your parents may be nearing or already in retirement. Now is a great time to have an honest discussion with them about their plans as well as their finances. This will give you visibility into whether you may need to provide them with some support in the future. For more information, listen to our podcast on the topic.
  5. Create a financial plan. As your financial situation becomes more complex, it’s even more important to have a clear view of your assets, liabilities and broader financial status. A tailored financial plan will provide that.

This list is certainly not exhaustive, so please contact your wealth management team if you have any questions or would like to work with us to get started on your financial plan. We’d be happy to help—after all, we’re The Planner You Can Talk To.

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.

Adviser Investments in the Media

This week, Director of Research Jeff DeMaso spoke to The Philadelphia Inquirer about Vanguard’s plans to launch an actively managed China fund.

In this week’s Market Takeaways, Research Analyst Liz Laprade examined the latest cryptocurrency crash, while Vice President Steve Johnson explained why investors should keep the sports truism “good defense makes good offense” in mind these days.

Looking Ahead

Next week, the spotlight will shine bright on the Fed’s two-day meeting, which closes with a Wednesday-afternoon press conference by Chair Jerome Powell. We’ll also be looking closely at data on small-business confidence, retail sales, manufacturing and a slew of construction reads (homebuilders’ confidence, housing starts and building permits).

As always, please visit 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 or call 800-492-6868.

Please note: This update was prepared on Friday, December 10, 2021, prior to the market’s close.

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