Stocks Are Low on Gas, But Bonds Are Back

Inflation knocked a brief stock market rally on its heels this week. Friday’s report that food and energy prices drove the consumer price index (CPI) to a four-decade high of 8.6% in May, baffling the consensus that thought inflation would begin to wane, was all Wall Street needed to lean on the “sell” button.

The S&P 500 index has declined 2.5% over the last three trading days through Thursday and was off more than 2% on the day as of Friday afternoon.

Persistent price spikes, with sticker shock at the pump the latest culprit, has investors rethinking their portfolios as the Federal Reserve prepares to use all its tools to combat inflation.

The challenge for Fed Chair Jerome Powell and his fellow policymakers is how to dial up interest rates enough to slow inflation without capsizing the economy. This task is made more difficult due to the economy being so far out of whack in the wake of the pandemic—as we’ll show below.

Despite the market’s fluctuations, our portfolios remain focused on the wealth creation and protection that keeps you on track for your long-term goals and objectives—and we’re always a phone call away should you want to revisit your personal financial plan.

Economy Still Seeking Equilibrium

As the inflation data clearly shows, the 2020 pandemic skewed economic data almost beyond recognition, and like a pendulum that swings too far one way and then the other, it will take a while to recover equilibrium. Until we’re back on terra firma, we’re casting a critical eye on all estimates and assessments of domestic economic health.

Let’s focus on the consumer.

Recent talk about retail sales would have you believe we’re on the verge of a shopping Armageddon. Sales plunged in the pandemic as restaurants and stores shut down—though of course spending on things like toilet paper jumped initially (sorry to dredge up that memory). As the economy then reopened, retail spending rebounded vigorously, running up against broken supply chains. And voila, we have a 40-year-high inflation rate.

To add to retailers’ troubles, consumption patterns, which shifted during the pandemic shutdown, shifted again, resulting in a huge mismatch between what stores have in stock (inventory) and what shoppers want to buy. Service companies (think airlines, for instance) suddenly didn’t have supply to meet post-pandemic demand either.

In short, it’s been a tumultuous couple of years for businesses and consumers adapting to pandemic life; if you don’t think we’re coming off some of the craziest sales and shopping data in decades, we’ve got a few extra cartons of Lysol wipes in the Adviser Investments supply closet that are up for grabs.

Consumer savings and incomes are directly related to retail sales. And they soared during the pandemic as well. The government’s attempts to stave off economic calamity led to monthly payments from Uncle Sam, PPP loans to businesses and other cash that went sloshing into bank accounts during the economic shutdown. Incomes rose, collectively, during the pandemic—this enabled the rebound in spending highlighted above. And with generally fewer places to spend money, personal savings went up as well. But is the recent decline in the savings rate as bad as the headlines make out or merely the pendulum swinging back to normal? We’d argue the latter.

The point here is that the economic data is still noisy. It’s mid-June and we may be near the end of the second consecutive quarter of negative GDP growth. Does that mean we are in a recession? Technically, no. It’s possible that the official arbiter, the National Bureau of Economic Research, will declare a recession (well after the fact), but if this is a recession, it is (so far) a mild one given that most other broad measures of the economy are still indicating growth and a high level of activity. As we said, the data is noisy.

Bonds Are Acting Like Bonds Again

One positive sign in the markets: Bonds are finally playing to type. As Senior Vice President, Fixed Income Chris Keith, aka “The Bond Guy,” writes in his latest commentary, bonds are behaving more like bonds again after an unusually protracted and uncharacteristic sell-off. Check it out here!

RMDs and the 10-Year Rule: An IRS Curveball

Question: Can you shed some light on the IRS’ confusing new rule for IRA inheritance?

Andrew Busa, Manager of Financial Planning:

You’re not the only one caught looking after the IRS threw its latest curveball. Their recent guidance was a surprise, and we’ve seen conflicting interpretations in the news and on social media.

Here’s what we know: The SECURE Act of 2019 put an end to the “Stretch IRA,” whereby individual retirement accounts could be passed along from one generation to the next, earning tax-free growth. Instead, the SECURE Act implemented a “10-year rule” requiring the entire IRA account to be disbursed by the end of the 10th year following the original IRA owner’s death.

Recently, the IRS took the 10-year rule nine steps further. According to their March 2022 interpretation, the taxman seems to be saying that, if the original IRA owner died before they were required to begin taking required minimum distributions (RMDs; their 72nd birthday), then certain beneficiaries must empty the account in 10 years and take annual RMDs in years one through nine.

There are a few important caveats. First, the 10-year rule does not apply to eligible designated beneficiaries, including surviving spouses and children under the age of 21, as well as beneficiaries who are disabled, chronically ill or “not more than 10 years younger than the participant.”

The IRS interpretation and its caveats are a mouthful. Yet we’d note that this guidance isn’t codified yet; more modifications may come before these rules are the law of the land. For now, we’re advising beneficiaries to wait to make final decisions about the timing of distributions until the regulations are finalized—likely later this year. We’ll be keeping an eye on this for you.

In the meantime, reach out to your wealth management team with specific questions or to discuss your distribution strategy within the context of your overall financial plan.

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.

Your Financial Plan
Get Ready to Retire: 5 Steps

Retirement is a major milestone and we’re here to help you prepare financially and emotionally. Our top-five list of things to address before you retire will make it even more manageable.

1. Make the most of your Social Security benefits: Social Security is the number one topic pre-retirees ask us about. An essential first step to becoming fully informed is creating an account at ssa.gov to get an estimate of what your Social Security benefits will be. Exactly when you choose to begin taking Social Security will impact your income throughout your retirement—retire early and you’ll face penalties that could cost you thousands; delay a little longer than the standard retirement age and you can reap substantial benefits. Before you start taking your benefits, talk to your adviser about how to maximize Social Security as part of your retirement income.
2. Have a health care strategy: Enrolling in Medicare when you reach age 65 is crucial, but there’s more to health care in retirement than that. If you plan on retiring before 65, how will you bridge the gap between employer coverage and Medicare? Will Medicare be sufficient for your needs, or will you need supplemental insurance for items it doesn’t cover? There are many options—tap your wealth management team to help you navigate the complexity.
3. Top off your emergency fund: It’s wise to hold three to six months’ worth of expenses in a cash account to meet unexpected needs, but it’s especially important as you prepare to retire. Yes, you’ll have your asset base to draw upon to meet those expenses. But you’ll want to keep that money invested for as long as possible, accumulating compound interest, to help carry you through as many as 25 to 30-plus years in retirement.
4. Revisit your financial plan: A well-built financial plan can provide a roadmap to retirement, but it’s important to course-correct as the day draws near. As you make decisions on where and when to retire, it’s worthwhile to review your spending needs, estimate your taxes (especially if moving to a new state or selling your home) and consolidate accounts to get the clearest possible picture of your retirement income. It’s also a good idea to review your investment portfolio and make sure it’s allocated to preserve your assets as you transition into retirement. Reviewing your plan with your adviser will provide peace of mind and allow you to make the adjustments you need to retire according to plan.
5. Account for your free time: Many people look forward to having more leisure time in retirement. Far fewer have a plan for what they’ll do with it. The average retiree watches around 40 hours of television per week—for most of us, an enjoyable retirement will require a bit more than adding Disney+ to complement our Netflix subscription. Whether you’re interested in using your professional expertise to be a consultant or devoting more time and money to causes you care about, thinking through the costs and benefits of your new lifestyle is an important part of your retirement plan, both for your bottom line and your peace of mind.

Contact your portfolio team if you would like to create or revise your financial plan in advance of retirement. Our team is eager to assist—after all, we are The Planner You Can Talk To.

Adviser Investments in the Media

Chairman Dan Wiener was featured on CNBC this week with a look at how higher bond yields are benefiting investors (you can watch his segment by clicking here).

Chief Investment Officer Jim Lowell appeared on Fox Business with a look at how consumers have thus far proven their mettle even if we may already be in a recession, technically speaking.

Director of Research Jeff DeMaso spoke to Pensions & Investments about Vanguard’s hot pursuit of BlackRock in the race for the most institutional assets under management.

Portfolio Manager Adam Johnson stopped by Fox Business to discuss energy- and tech-sector valuations.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade checked in on recent developments in Elon Musk’s Twitter pursuit, while Portfolio Manager Steve Johnson offered his thoughts on hotter-than-expected inflation in May and what might be the culprit.

Looking Ahead

The Federal Reserve’s policy statement and Chair Jerome Powell’s press conference Wednesday afternoon will command center stage next week. While we’ll be poring over reports on the state of the housing market (homebuilders’ confidence, housing starts, building permits) and small-business owners’ views on current economic conditions, global markets will swing on every Powell utterance.

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 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.