A Rocky Road for Retail Sector Risks?

A Rocky Road for Retail Sector Risks?

Please note: This update was prepared on Wednesday, November 23, 2022, prior to the market’s close.

Even though much of Wall Street started its holiday early—one measure of trading activity has been the slowest since Jan. 3—remaining traders have been gobbling up bargains as stronger-than-expected earnings in the retail sector may signal reduced risks and that the holiday shopping season will be cheerier than earlier expectations.

Heading into the year’s final month, Federal Reserve policymakers’ aggressive interest-rate moves and the resulting impact on stocks, bonds and housing remain front of mind. As today’s release of minutes from its meeting earlier this month showed, the Fed remains laser-focused on tackling inflation even as debate grows about whether the spate of 0.75% increases has begun to take effect, auguring a slower pace of hikes going forward. We’ll continue watching closely and adjusting your portfolios and financial plans accordingly.

After nearly 30 years in business, it’s in challenging years such as 2022 that we’re especially thankful for your continued trust and confidence. Have a safe and happy Thanksgiving.

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

  • Battered by high inflation, Americans are curtailing their holiday spending plans. A Deloitte survey found that consumers planned to buy an average of nine holiday gifts this year, down from 16 a year ago. And according to a recent University of Michigan gauge, consumer sentiment dipped to a level only seen during the 2008–2009 financial crisis and the period of double-digit inflation in the late 1970s. How will retailers coax shoppers to spend during the critical holiday season?
  • Some price relief may be on the way this Black Friday, as merchants look to clear inventory stockpiled due to supply chain concerns a year ago. Companies like Target are aggressively discounting bloated overstock of home furnishings, electronics and toys. Retail industry analysts at Adobe Analytics predict record online discounts on computers, toys and TVs this weekend.
  • Housing is hurting. U.S. home sales dropped for the ninth month in a row in October, a record streak since tracking began in 1999. Sales last month were off 28.4% from the same time last year, owing mainly to mortgage rates having doubled since October 2021. Even as borrowing costs have risen, home prices have continued to climb—albeit at a less dramatic rate—because supply remains tight.
  • Consumers aren’t the only homebuyers easing off as borrowing costs rise—institutional investors are becoming choosier as well. Real estate investing firms purchased 66,000 houses in the third quarter according to Redfin. That’s down from 94,000 in Q3 2021, a spending spree that helped push the housing market into overdrive. When it comes to housing at least, the Fed’s monetary policy has been effective in driving demand down. Now we’ll wait to see if prices follow.

Signal From Static: The 60/40 Is Dead. Long Live the 60/40.

Co-founder and Chairman Dan Wiener

The 60/40 portfolio (60% stocks, 40% bonds) is dead. You know it, I know it, and certainly the pundits seem to know it. Or at least that’s the assumption given all the media hype. Heck, looking at the chart below, it’s easy to see why:

60 40 portfolio struggles aren't alone
Note: Chart shows hypothetical portfolio performance of a $100 investment from Dec. 31, 2021, through Oct. 31, 2022, allocated 60% in Vanguard’s 500 Index fund and 40% in its Total Bond Market fund. Sources: Vanguard, Adviser.

For decades, advisers have been recommending investors allocate 60% of their portfolios to stocks and 40% to bonds because, typically, when one fell the other rose, smoothing returns over time. And when stocks or bonds underperformed long enough, the prescribed cure was rebalancing, or selling portions of the outperforming asset class and buying the underperformer to maintain that golden ratio. Whether rebalancing actually improves performance or mitigates risk is a discussion for another day. But it certainly hasn’t worked this year.

It’s easy to second-guess yourself and think, “Well, maybe I should have been a bit more cautious.” Or, given the unprecedented shellacking bonds have taken in 2022, you might wonder if you should have decreased your allocation to fixed income and taken a dive into equities, where yields were at least competitive and potential gains were greater. If the 60/40 is dead, could a 20/80 or an 80/20 allocation have survived this bear attack?

The following chart shows the monthly performance of five portfolios allocated to combinations of Vanguard’s 500 Index fund and Vanguard’s Total Bond Market Index fund.

Every portfolio allocation suffered in 2022
Note: Chart shows hypothetical portfolio performance of a $100 investment from Dec. 31, 2021, through Oct. 31, 2022, allocated to Vanguard’s 500 Index fund (“stocks”) and its Total Bond Market fund (“bonds”). First number represents percentage allocated to stocks: “20/80” reflects 20% invested in stocks and 80% in bonds; “80/20” shows 80% in stocks and 20% in bonds, etc. Sources: Vanguard, Adviser.

No matter how you slice and dice it, the results are the same: At the end of October, the portfolios’ values ranged from $82.59 to $83.78, a meager difference of—unbelievably—just $1.19 (or 1.19%) of the original $100 investment. The results are virtually identical for those who rebalanced monthly.

The reason is simple: Not only have bonds and stocks fallen, but they’ve fallen at about the same rate. Rebalance or not, virtually all investors who’ve stuck with one consistent allocation throughout 2022 are at the same place today.

Where are the “Death of the 20/80 Portfolio” headlines? Nowhere, of course. So, let’s be fair. The 60/40 was certainly not an outlier in this annus horribilis.

Chart of the Week: A More Expensive Thanksgiving

Portfolio Manager Jeff DeMaso 

As with seemingly everything else in our lives, Thanksgiving dinner is more expensive this year than last.

The Bureau of Labor Statistics gets fairly granular in its inflation tracking—though some of its category names are a little clunky, so I’ve simplified them a bit. (For example, turkey is found under the “Raw Poultry” category.) As you can see, turkey prices in October were up about 17% compared to October 2021.

But it’s the bakers among us who face the biggest price increases. If you were looking to wow your guests with a homemade pie, well, eggs, butter and flour prices are up 25% to 45% over the past year.

The fact that headline inflation ticked lower the past month is of little solace to those of us shopping for the holiday meals. Bon appétit.

thanksgiving meal inflation
Note: Year-over-year change (non-seasonally adjusted) as of October 2022. Sources: Bloomberg, Bureau of Labor Statistics. * Including pumpkin.

Medicare Open Enrollment: Don’t Miss It

Wealth Adviser Diana Linn

Like clockwork, Medicare’s Open Enrollment Period runs from Oct. 15 through Dec. 7 every year. This means you have two weeks left to retool your coverage before the window closes.

Here are a few things to remember to make the process easier to manage:

First, the term “open enrollment” can be a little misleading, as it’s not actually open to everyone. This period is intended for anyone currently enrolled in Medicare to make changes to their supplemental coverage. If you are within the seven-month window of your 65th birthday and ready to begin Medicare, there is a separate sign-up process called Initial Enrollment Period.

Next, be sure you know your current coverage before making a change, and understand the ABCs of Medicare in general:

  • Medicare Parts A and B—commonly known as “original Medicare”—offer the same basic coverage for everyone. Broadly speaking, Part A covers hospitalization and Part B is your medical insurance to help pay for services from health care providers.
  • Beyond Parts A and B, you’ll most likely need some supplemental coverage to bridge gaps. That’s where Part C comes in, also known as a Medicare Advantage Plan or Medigap—both of which are administered by private insurance companies.
  • During open enrollment you can also elect to add Part D coverage, which is the Medicare prescription drug benefit.

Lastly, it’s important to know the things you can change during this annual election period: You can switch from Original Medicare to Medicare Advantage; switch from Medicare Advantage to Original Medicare; switch from one Medicare Advantage plan to another; or enroll in Part D prescription coverage or drop your prescription plan.

This can be confusing, so if you need help sorting through your options during Medicare’s Open Enrollment Period, please call on us. We’re ready to help.

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

No trades

AIQ Tactical Defensive Growth

No trades

AIQ Tactical Multi-Asset Income

Sell Invesco DB Commodity Index Tracking Fund (DBC)

Buy iShares JP Morgan EM Local Currency Bond ETF (LEMB)

AIQ Tactical High Income

No trades

Adviser Takeaway

In this week’s Adviser Takeaway, Senior Research Analyst Liz Laprade looked at the fallout from crypto firm FTX’s failure.

Looking Ahead

Next week, we’ll be reviewing a cornucopia of fresh data, including reads on home prices, consumer confidence, manufacturing, job openings and quits, inflation, third-quarter GDP, consumer spending and disposable income, vehicle sales, the Fed’s “Beige Book” of anecdotal reports from around the country, and the November unemployment rate.

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

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 Wednesday, November 23, 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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