What Will the Fed Do About Inflation?

What Will the Fed Do About Inflation?

Please note: This update was prepared on Thursday, August 25, prior to the market’s close.

For all the stock and bond markets’ ups and downs this week, Wall Street traders have been biding their time as they await Federal Reserve Chair Jerome Powell’s Friday speech at the central bank’s annual symposium in Jackson Hole, Wyoming. Questions of recession and inflation, not to mention corporate earnings, consumer confidence and the health of the housing market, have also grabbed headlines and traders’ eyeballs.

Here’s what we’re watching and why it matters:

  • July figures for core inflation, the Fed’s preferred yardstick, will be out Friday morning. Confirmation of the month’s earlier data showing inflation may have peaked in June might be enough to convince policymakers to ease up on further interest-rate hikes.
  • People are paying their bills. A report from the Fed’s Board of Governors shows residential mortgage delinquencies declined in the second quarter to their lowest level since 2006. Consumer loan delinquencies are also near their historic floor. A persistent rise in late payments has been one of the most reliable recession indicators—and we’re not seeing it in the data.
  • But all is not rosy in real estate. July sales of new homes fell to the lowest level since January 2016—a sure signal that rising mortgage rates are putting pressure on the housing market. As supply-chain-slowed projects finally come to market later this year, we could see prices falling if supply overwhelms demand. The bright side: A recent increase in mortgage applications for first-time buyers suggests that the American dream of home ownership is still alive and well.

Retiring in a Bear Market: Pressure Testing the 60/40 Portfolio

What if the stock market declines just after your retirement—can a balanced portfolio recover over time?

We decided to crunch some numbers.

Anyone nearing retirement today remembers the global financial crisis (GFC) of 2007–2009 and the bear market it sparked. From its peak in the fall of 2007, U.S. stocks lost more than 50% of their value, even with dividends included, over the next year and a half. It took more than three years for the stock market to fully recover that loss.

If you’d retired in October 2007 with a portfolio of $1 million, how would you have fared? Would your portfolio have recovered, despite making withdrawals to cover expenses?

The answer is yes. An investor with a moderate appetite for risk—that is to say, one investing with a traditional allocation of 60% of their portfolio in stocks and 40% in bonds—who withdrew $3,500 each month (or $42,000 per year) would have seen their portfolio bounce back to its pre-crash peak in July 2013. Adjusting for inflation doesn’t change the outcome much: Assuming withdrawals increased to keep pace with inflation, the portfolio was back to its starting point three months later.

Partly, that’s because bonds did their bit for our moderate-risk retiree. While the stock market declined by more than 50% during the GFC, bonds, at their worst, fell only 4%. The 40% allocation to fixed-income securities in our retiree’s portfolio helped provide a steady income stream and a shock-absorbing damper during the worst months of the bear market.

Note: Chart shows impact of the global financial crisis on a $1 million portfolio invested 60% in Vanguard Admiral Total Stock Market Index and 40% Vanguard Admiral Total Bond Market Index (rebalanced monthly) using monthly returns from 10/31/2007 through the account’s recovery to $1 million (10/31/2013 for the Inflation-Adjusted Withdrawals line). The Monthly Withdrawals line used a rate of $3,500 a month; the Inflation-Adjusted Withdrawals started at $3,500 and adjusted each month for historical inflation. Sources: Adviser Investments, The Vanguard Group, Bloomberg.

While it’s comforting to know a portfolio can climb back over time, enduring a bear market can be unsettling. If merely eyeballing the chart makes your anxiety spike, talk to your adviser to be sure your financial plan has the flexibility to wait out the worst of a bear market or any other financial challenge.

Chart of the Week: The Recession Question (and Our Answer)

Interim Chief Investment Officer Jeff DeMaso

Durable goods orders—think appliances, tools, computers, TVs, furniture, cars, trucks and airplanes—are looking strong. Not only did manufacturers ship a record amount in July, but orders for new durable goods came close to hitting a new high as well. Strip out the more volatile transportation component and orders are at a record level. It’s hard to call this a recession with that kind of economic activity.

This chart shows the monthly value of durable goods shipments and orders placed. They are near record highs as of July 2022.
Note: Chart shows monthly dollar value of durable goods shipments and orders from February 1992 through July 2022. Source: U.S. Census Bureau.

On the other hand, the housing market has cooled substantially. Fewer new homes were sold in July 2022 than were sold in April 2020—when the full COVID-19 lockdowns were in effect. On top of that, the supply of new homes is near record highs as well. Yes, a lot of the new homes for sale are still under construction, but as they are completed, it should put downward pressure on prices. In short, the data coming out of the housing market is what you’d expect to see in a recession.

Note: Chart shows annualized monthly new home sales from December 1969 through July 2022 along with periods of recession. Sources: U.S. Census Bureau, Federal Reserve Bank of St. Louis.

So, are we or are we not in a recession? Gross domestic product (the combined value of all goods and services produced in the U.S.) declined in the first two quarters of the year, and this is often pointed to as a sign of recession—but I think that signal is wrong this time around. We are still dealing with the aftershocks of the pandemic in both the data and in consumer behavior. Those who claim we are in a recession are guessing or simply being selective in the data they choose to highlight and the data they choose to ignore.

Good News for Social Security Recipients

Manager of Financial Planning Andrew Busa

If you receive Social Security benefits, you’re up for a nice raise next year. 

We’ll get the final number in October, but based on early estimates, Social Security recipients can expect an 8%–9% increase in their payments in 2023. This amounts to roughly an additional $150 per month for the average beneficiary. All told, this would be one of the largest Social Security adjustments since the program’s 1935 inception.

Another point worth mentioning: You could benefit from the adjustment even if you’re not yet tapping into Social Security. If you are at least 62 in 2023, the cost-of-living increase will be taken into account when calculating your eligible benefits, even if you delay taking Social Security until you’re 70.

We’re glad to share the good news. That said, it’s likely that Social Security is just a part of your financial plan for your future income needs. Talk to your adviser today about any concerns you have and any adjustments you need to make to live comfortably in retirement.

Podcast: Making the Most of Life Insurance

A successful financial plan is all about managing risk—especially planning for worst-case scenarios. And what could be worse than the possibility that you won’t be there to care for the people that need you most? In this episode, Manager of Financial Planning Andrew Busa and Financial Planner Adrian Baldeon discuss the ins and outs of life insurance, including:

  • How much coverage do you really need?
  • The differences between term and whole life
  • How and when life insurance benefits may be taxed
  • Does life insurance still make sense when you’re in retirement?

Being well covered is one of the most important things you can do to be sure your family is well cared for. Listen now to learn how!

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
AIQ Tactical Global Growth

Buy Cash

Buy iShares North American Tech-Multimedia Networking ETF (IGN)

Sell SPDR S&P Transportation ETF (XTN)

Sell VanEck Semiconductor ETF (SMH)

AIQ Tactical Defensive Growth

Buy Cash

Sell iShares Core S&P 500 ETF (IVV)

AIQ Tactical Multi-Asset Income

Buy Cash

Buy Vanguard Dividend Appreciation ETF (VIG)

Sell iShares Preferred and Income Securities ETF (PFF)

Sell Real Estate Select Sector SPDR Fund (XLRE)

AIQ Tactical High Income

Buy Cash

Sell iShares iBoxx USD High Yield Corporate Bond ETF (HYG)

Sell iShares 0-5 Year High Yield Corporate Bond ETF (SHYG)

Sell Xtrackers USD High Yield Corporate Bond ETF (HYLB)

Sell Invesco Fundamental High Yield Corporate Bond ETF (PHB)


Adviser in the Media

Chairman Dan Wiener spoke to Financial Advisor IQ and ThinkAdvisor about Vanguard’s new fees for customers who are still using its mutual-fund-only platform, and Portfolio Manager Adam Johnson stopped by Fox Business to discuss inflation, the Fed narrative and the state of the stock market.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade took the temperature of the bath that Bed, Bath & Beyond shareholders have been taking, while Andrew Busa covered the cost-of-living increases to Social Security payments

Looking Ahead

Next week, we’ll get more on consumer confidence, home prices, productivity and manufacturing, as well as a bevy of reports on the employment market. Analysts will also have their teacups and saucers at the ready, anticipating several speeches by Fed officials that may offer insight into the central bankers’ read on the economy post-Jackson Hole.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser 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, August 25, 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. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.

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