Will Rate Hikes Follow After a Taper? | Adviser Investments

It’s Time to Taper…Will Rate Hikes Follow Fast?

A blockbuster jobs report paired with news that Pfizer’s Paxlovid pill could dramatically curb the risk of hospitalization and death from COVID-19 made for a decidedly upbeat start to the trading day today.

The U.S. economy created 531,000 new jobs in October, trouncing expectations as the nation’s unemployment rate dropped more than anticipated, to 4.6%. We’re still 4.2 million jobs down from pre-pandemic days, but this latest spike moves the needle in the right direction.

Speaking of spikes, “Dow 36000” finally arrived this week, a mere 17 years after the eponymous late-90s business bestseller predicted it would. A combination of strong earnings, the uptick in hiring and traders’ relief over the news from the Federal Reserve this week—taper yes, rate hike no—helped propel markets to a new string of highs.

Dow 36,000 became a bit of a punchline after the ballyhooed book was followed by the market’s 2001 crash, which saw the index drop over 3,000 points, more than a quarter of its value at the time. In interviews this week, the authors complained that their larger point had been missed. Namely, that even when the market is making strong gains, long-term investors shouldn’t get skittish. That may be a lesson worth pondering for today’s investor—let’s hope it doesn’t take 17 years to sink in.

Total Returns as of 11/4/21

It’s Taper Time

They’ve said it, they’ve repeated it and now they’re doing it: The Fed will begin tapering bond purchases this month. The central bank has been buying at least $120 billion of Treasury and mortgage-backed bonds each month since the pandemic first cratered the economy in March 2020. In November, they’ll trim that down to around $105 billion, and they’re expected to knock off another $15 billion each month going forward—though they reserve the right to change course.

This is a small step in the direction of the Fed shifting from an accommodative to a restrictive policy. But, for the time being, the Fed is still purchasing billions of dollars of bonds each month and interest rates are pinned at near zero-bound.

Moreover, Fed officials went out of their way to say that they have no immediate plans to hike rates and reiterated their view that the high inflation numbers we’ve seen recently are a temporary effect of the pandemic. The Fed is not suddenly slamming on the breaks to slow an overheating economy.

For investors, it’s important to recognize that policymakers starting to taper bond purchases isn’t a reason to avoid the stock or bond markets. The Fed began dialing back its purchases in the last market cycle in December 2013, and in the 12 months after that—calendar year 2014—the S&P 500 returned 13.7% (including dividends) and the Bloomberg U.S. Aggregate Bond index gained 6.0%. Clearly, it’s possible for stocks and bonds to do well while the Fed is reducing its bond purchases.

Services in High Demand, Short Supply

The ISM Non-Manufacturing Index—which measures activity in the service sector—came in at 66.7 in October. (Anything above 50 signals growth.) Strikingly, the five highest readings in the index’s 24-year history have been recorded this year; October’s was the highest on record.

This doesn’t signal that the economy is overheating. A peek under the hood of the index highlights the mismatch between demand and supply. Measures of business activity and new orders sit at all-time highs. It was a different story for delivery times, which rose to a reading of 75.6 from 68.8 in September—meaning longer waits. Additionally, the backlog of orders also rose to a record high.

It seems clear that the demand is there for services; the question is how companies will adapt and repair supply chains to satisfy their customers’ needs. Nevertheless, for a consumer-driven economy like ours, with demand this strong, it’s hard to argue against growth.

Chart of the Week: Small-Caps Catch Up

We monitor a wide range of data to form our outlook on the market and the broader economy—every other week, we’ll spotlight one indicator our analysts have found informative.


Small Caps Catch Up                                                                                                Note: Chart shows daily index level of the S&P SmallCap 600 index from 12/31/20 through 11/3/21. Sources: S&P Dow Jones, Adviser Investments.

Director of Research Jeff DeMaso Director of Research Jeff DeMaso had this to say:

The S&P 500 index’s largest drawdown this year has been just over 5%, and it took the large-cap flagship only about a month to recoup that loss and start reaching new record highs. Small-caps? Different story. The S&P SmallCap 600 index peaked on June 8, then fell 10%—correction territory. It finally recovered that ground on Wednesday, when it set a new record high. While large-cap stocks have led the market recently, small-cap stocks are getting back in the game—a signal of a broadening market rally.

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.

Financial Planning Friday
When Should You File for Social Security?

Questions about Social Security come up all the time in our financial planning conversations with clients. It’s a complex issue with numerous angles to consider, but we’ll start by looking at four key factors you can evaluate to decide when to file for your Social Security benefits.

1. Your full retirement age (FRA). Your FRA is the age when you are eligible to receive your full Social Security benefits. Your birth year determines your FRA. If you were born between 1943 and 1954, it is age 66. For those born between 1955 and 1960, FRA increases by two months a year (so for someone born in 1956, it would be 66 and four months) up to age 67 for anyone born in 1960 or after (see the Social Security Administration’s full retirement age table for a full breakdown).

Your benefits are reduced or increased if you file before or after reaching FRA. Age 62 is the earliest you can file, and benefits top out when you turn 70. (There is no advantage to filing after age 70.) If you file before your FRA, your benefits will be permanently reduced by 8% per year. On the other hand, every year that you wait to file beyond your FRA results in an increased benefit of 8% per year—and that amount lasts for the rest of your life and that of a surviving spouse. Check out this tool to determine your FRA.

2. Your benefits. The Social Security Administration (SSA) mails a statement to all workers three months before their 60th birthday that shows what their estimated monthly benefits are likely to be. You can also create an account at ssa.gov to review your benefits at your convenience. We suggest doing this sooner rather than later to help you with your retirement-income planning.

3. Your career plans. If you are still working when you file for benefits, you may see those benefits reduced, particularly if you haven’t reached your FRA. Believe it or not, they could be cut by as much as $1 for every $2 you earn above $17,640 per year. So if you plan to continue working and you haven’t hit your FRA, you may want to hold off claiming benefits for now.

4. Your family health history. Life expectancy plays a large role in calculating your optimal filing time. While you get an 8% increase in your benefits for every year after your FRA that you delay, the sum of all benefits received by waiting until age 70 often won’t exceed what you’d tally by filing earlier unless you live into your late 70s or early 80s. However, delaying benefits to lock in that yearly increase does provide a form of longevity insurance for those who anticipate a long, healthy retirement.

We’ll have more to say in the coming weeks on the ins and out of Social Security. In the meantime, you can read our special report Social Security’s Role in Your Retirement or listen to our “When Should You File for Social Security?” podcast episode for additional information. And please contact your wealth management team with questions about your specific situation. We’re The Planner You Can Talk To and here to help.

Adviser Investments in the Media

This week, Chief Investment Officer Jim Lowell offers his thoughts on year-end investment themes.

In this week’s Market Takeaways, Research Analyst Liz Laprade discussed Hertz’s big bet on Tesla, while Steve Johnson offered his thoughts on the stock market’s melt up.

And remember, you can always visit the Adviser in the Media section of our website for the Adviser Investments team’s informative views on the market and the economy.

Looking Ahead

Next week’s slate is slim but significant: We’ll get small business and consumer sentiment reads, wholesale inventories, and, most importantly, fresh inflation numbers.

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.

If you have any questions or concerns, please don’t hesitate to email your wealth management team or call our toll-free number, (800) 492-6868.

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 Friday, November 5, 2021, prior to the market’s close.

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