Please note: This update was prepared on Friday, September 10, 2021, before the market’s close.
A note from Chairman Dan Wiener: September 11 marked the 20th anniversary of the terrorist attacks and losses of life in New York, Pennsylvania and Washington, D.C. The memories are difficult, and the news media is already filling with retrospectives, analysis and heart-rending stories of families torn apart in a matter of minutes; many were left with holes in their lives that may never fully heal. My then 14-year-old daughter watched from her classroom window as people fell from the World Trade Center towers before she was evacuated to northern Manhattan and eventually reunited with her brother, her mother and me that afternoon. All of us at Adviser Investments remember where we were on that fateful day and our hearts and our collective sorrow go out to those most affected by the events of 9/11/01.
Is the rise of the delta variant tied to the nation’s lackluster jobs picture?
Economists and investors alike are beginning to worry about whether the delta variant is flattening the curve of economic recovery more than anticipated.
Last week’s disappointing jobs report lingered over this Labor Day-shortened trading week. As of Thursday’s close, both the Dow and S&P 500 indexes marked their first four-day losing streaks since June.
Reports from Federal Reserve banks across the country contributed to the overall impression, pointing to a deceleration in economic activity largely attributable to “a pullback in dining out, travel and tourism” due to safety concerns following the recent rise of the highly contagious strain of COVID-19.
Delta’s threat to the recovery inspired President Biden to take off the gloves. After initial reluctance, he moved aggressively yesterday to implement a vaccine mandate for roughly 100 million workers—two-thirds of the U.S. workforce—setting up yet another political fight that will take us well into the fall.
The Great Jobs Reshuffle
American workers and their employers are having trouble seeing eye to eye. As mentioned, August’s jobs report disappointed to the extreme, with just 235,000 new hires reported compared to the 700,000-plus economists had expected; it made for the lowest number of jobs created per month since January. Either people are not ready to return to work or employers are unable to find workers with the required skills.
Businesses seem eager for applicants: Job postings for July rose to 10.9 million, up from 10.2 million the prior month, according to the Labor Department—exceeding economists’ expectations. Layoffs, too, have eased, with new unemployment claims falling to a pandemic low of 310,000 this week.
If employers are so desperate for labor, why are so few new jobs being filled?
Part of the decline in actual hiring is attributable to the sectors most affected by pandemic restrictions—such as travel and leisure. After an earlier acceleration, these businesses are slowing again even as other industries continue to take on new workers. Travel bans and visa restrictions are also having an impact on industries that traditionally attract laborers from abroad. And, certainly, the pandemic seems to have been a watershed moment that redefined what people want from work, with jobseekers holding out for more interesting, flexible and/or better-paying jobs.
Some of the mismatch may be resolved in the weeks to come. Extended federal pandemic unemployment benefits came to an end this month and most schools have returned to in-person learning—both are factors that may push people from the sidelines back into the office or worksite. However, recent data still doesn’t fully reflect any toll the delta variant may have taken on hiring—and flu season has not yet arrived.
The bottom line is that the overall hiring picture remains murky. And the longer it takes to return to full employment, the slower our overall recovery. The silver lining: Opportunities for those who want to work are likely to stay relatively plentiful for the foreseeable future.
Bitcoin: Still Not Ready for Prime Time
You may have seen the news this week that bitcoin has, for the first time, been adopted as legal tender…in El Salvador. Is this a sign that cryptocurrencies are ready to move out of the financial ether and into the real world?
Nah. Not in our book.
First, it’s worth noting that this impulsive experiment in crypto adoption was ushered through the country’s legislative process in the dead of night by Salvadoran President Nayib Bukele—this despite opposition from more than two-thirds of the population. Bukele hoped to win over naysayers with a $30 bitcoin credit for residents who adopted Chivo, the government-run e-wallet that would allow payments in bitcoin or dollars anywhere around the world.
Those grand plans ran aground almost immediately. The government was forced to pull Chivo from app stores as thousands of users found themselves unable to access it the day it rolled out. The difficulties helped spark a “flash crash” in bitcoin, which dipped 17% over the course of a few minutes on Tuesday. The e-currency ended the day down 10%.
This isn’t the only spiky rally or heart-stopping drop the currency has experienced. Far from it. Over the past 12 months, bitcoin’s value has ranged from just over $10,000 to just under $65,000, surging and dropping with abandon.
If housing prices contribute to higher-than-expected inflation, the Fed could be more aggressive in applying the brakes to the economy, prompting concerns of slower economic growth. Policymakers will continue to weigh that decision against the state of the job market, which, as noted above, has not recovered as swiftly as many had hoped.
The “crypto” aspect of cryptocurrencies has worked well from the beginning. The currency part? Not so much. And that’s largely because of the incredible price volatility bitcoin and other cryptocurrencies have experienced since their creation, which was on display again this week. Nobody wants to buy a slice of pizza, and no merchant wants to sell that slice using a currency that’s worth $10 in the morning, $15 in the afternoon and $8 the following day.
Whether or not Bukele’s grand experiment ultimately pays off for El Salvador, other technical issues remain that may cripple bitcoin as a functional currency, including technical limits to the number of transactions that can be processed at once and increasing costs for processing them on the blockchain.
Safe to say, we’re glad that we’re not the guinea pigs in this experiment. Speculating on the price of bitcoin may (or may not) prove a gamble worth taking in the long run. But betting your entire financial future on it—as El Salvador just has—seems imprudent, to say the least.
Weekly Question: Dividend Stocks vs. Bonds
This week’s reader question: What’s your perspective on dividend-income stocks? With interest rates and bond yields as low as they are, do they serve as a good alternative to bonds?
Bonds and dividend-paying stocks both generate passive income to fund retirement spending and achieve other financial objectives. Yet, they are two distinct investment vehicles with differing risk profiles.
The trade-off is primarily about risk: Bonds are lower risk when compared to stocks, which also means they generally offer lower yields and returns. While dividend stocks are riskier than bonds, they provide a fairly reliable source of income plus the possibility of capital appreciation over time.
Of course, not all dividend stocks are created equal. I’m a big believer in dividend-growth stocks, which offer a lower yield compared to high-yield dividend stocks but grow their dividends consistently every year.
Dividend-growth stocks have yields that are comparable to bonds. For instance, the Vanguard Dividend Appreciation ETF has a yield of 1.6%. This is better than the yield on the 10-year Treasury bond (currently at 1.3%) and slightly lower than intermediate-term corporate bonds (currently yielding 2.0%).
The real power of these stocks in a portfolio, compared to bonds, is the growth of your income.
For instance, given today’s inflation concerns, many income investors are worried that their purchasing power will erode as costs for everything from food to gas to used cars have been rising. While the income from a bond remains constant, dividend-growth stocks increase their payments to investors. Over the last year, the top 10 stocks in the Vanguard Dividend Appreciation ETF posted a median dividend-growth rate of 9%—that’s almost twice the current rate of inflation.
In addition to growing income, dividend-growth investors participate in the growth of the company’s stock price over time. So, while you’re collecting that growing income, your principal investment is also increasing.
That makes dividend-growth stocks a no-brainer choice for those seeking income. But before you sell all your bonds, keep in mind that stocks expose you to much greater short-term risk. Bonds are a buffer in your portfolio when the stock market drops. While dividend-growth stocks have historically declined less than other equities, their share prices will fall when the overall stock market does. And they’ll fall much further and much faster than bonds.
Financial Planning Focus
Some financial planning concepts are intuitive. Annuities, which combine investment options with various forms of insurance, are not. As a retirement income tool, they’ve received increasing attention of late, especially after a provision in the SECURE Act—signed into law at the end of 2019—provided employers with incentives to include annuities in 401(k) plans.
But annuity contracts are often confusing and may not be the best solution for many retirees (similar to reverse mortgages, which we’ve covered before).
Let’s begin with the basics: At its core, an annuity is an agreement you make with an insurance company. You purchase the annuity contract either with a lump sum or via a series of payments. In return, the insurer commits to making a series of payments to you for as long as you live.
Two major factors distinguish one annuity from another: The timing and type of payments.
When you begin receiving payments…
Immediate annuity: Payments on an immediate annuity (also known as an “income annuity”) must begin within one year of purchasing the contract. Immediate annuities are always purchased with a single lump-sum payment.
Deferred annuity: Payments begin on a future date you select. While you wait, your money in the annuity grows.
The form those payments take….
Fixed annuities: Predictable and steady, fixed annuities offer a guaranteed interest rate and a fixed payment amount. The trade-off is that you might not benefit from any market growth.
Variable annuities: You select among investment options, often mutual funds, for preservation, growth or a combination of the two. Your payout is determined by how your investments perform.
One big disadvantage is that annuities can be costly, and you may incur substantial fees and penalties if your circumstances change and you need to withdraw your money. Withdrawals made from your annuity before you reach age 59½ trigger a 10% penalty, and you’ll owe income tax on any earnings. Most contracts also include a “surrender charge” of anywhere from 7% to 20% on withdrawals made within the first five to seven years of purchase.
At Adviser Investments, we are selective when it comes to annuities. An annuity may make sense if you’re concerned that you’ll outlive your assets. And we’ve found that they are a good fit for some of our clients. But generally, we believe that with consistent savings and well-built investment and financial plans, you can grow an asset base that will sustain you in retirement without taking on the high costs of annuities.
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.
Next week brings a much richer pile of data as we wave goodbye to the summer doldrums. Among the scheduled releases are core inflation numbers, retail sales data, business inventories, small business and consumer sentiment, import prices, and several reports on the manufacturing sector, as well as the federal budget.
As always, you can 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.
Please note: This update was prepared on Friday, September 10, 2021, before the market’s close.
This material is distributed for informational purposes only. The investment ideas and opinions contained herein 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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