Inflation Agita: Overblown

You’ve seen the hyperbolic headlines. Inflation is all over the news—that is, when Tesla CEO Elon Musk isn’t dominating it with characteristic excess.

This week’s consumer price index (CPI) inflation reading revealed prices were up 6.2% in October from the same time last year. That’s the fastest 12-month rise in three decades. The news prompted a sell-off in short-term bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. as traders fretted monetary policymakers would respond by raising interest rates faster and sooner than expected.

StocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. took a breather after five straight weekly gains and a slew of record-high closes. Even so, many U.S. stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. indexes are showing gains greater than 20% this year, while the bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. market is down slightly.

We think the inflation handwringing is a bit overblown, particularly when viewed through an investor’s lens.

The salient elements to stock returns (earnings and interest rates) remain conducive to continued gains as 2021 draws to a close. Consumers are flush with savings and higher prices have yet to put much of a dent in their ability to spend. Over 80% of S&P 500 companies beat earnings expectations in the third quarter and corporate leaders have adapted well to the spread of the COVID-19 delta variant and supply chain kinks—profit margins are near record highs. Even if this holiday shopping season is moderately curtailed by diminished supply and higher prices, the factors remain in place for a thankful and jolly end of the year for long-term investors, inflation be damned.

Another Way to Look at Inflation

Popular orthodoxy says inflation is here, it’s pervasive and it’s going to be a major problem—here’s an opposing view.

We’ve been lucky enough to live in a remarkably low-inflation environment for over a decade. More recently, the inflation rate (and how we all think about it) has been disrupted by pandemic dynamics and distortions.

We mentioned the “base effect” starting last spring—when inflation appeared high compared to the pandemic’s extreme lockdown lows. Over the summer, prices inched up due to spikes in “reopening” categories like hotel rooms, airfares and car rentals. Inflation slowed in those segments more recently, suggesting that rising prices aren’t tied to reopening alone. Rather, today’s inflation is being driven by labor shortages, supply chain bottlenecks, factory shutdowns abroad, robust consumer demand and rising fuel costs.

Our contrary stance, though, is based on other factors. Economists often look at three months of data and then annualize it to figure out whether the trends they’re seeing are accelerating or decelerating. To that end, the three-month annualized rate of core inflation (which excludes volatile energy and food prices) peaked in June, took a dive in September and only bounced back a bit in October, suggesting a slowing trend. The next month or two should give better clarity on inflation’s momentum—and one could argue that the worst may already be behind us.

To be clear, we’re not saying inflation isn’t worrisome in the short term. Typically, bond traders are more worried about long-term inflation. However, we’re seeing the opposite today—bond market yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. suggest that expectations for short-term inflation remain high while the outlook over a longer period is for lower prices on consumer goods and services. In fact, the gap between short- and long-term expectations is not only inverted—it’s the widest gap we’ve ever seen.

In sum, inflation is a headline grabber, but a lot depends on how you portray it. The bond market, where there’s real money on the line, doesn’t seem especially concerned if you consider the 10-year Treasury bond’s yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. is under 1.6%, lower than the 1.75% rate it hit in March.

As far as fighting inflation, while bonds continue to play a valuable portfolio role in protecting wealth by buffering your downside, stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. remain the best long-term wealth-building cure for higher prices.

Infrastructure—What’s in it for Investors?

The House of Representatives finally approved a $1 trillion infrastructure package. Now that they’ve cleared the Herculean legislative hurdle, where are the opportunities for stock investors in this massive infusion of cash? Everywhere you look.

The spigot of spending most obviously impacts companies that contract with state and local governments to supply and build: Gravel, steel, concrete and machinery suppliers as well as  construction and logistics firms will benefit from the $110 billion earmarked for new roads, bridges and tunnels and $25 billion more to upgrade existing airports.

And that’s just the tip of the infrastructure iceberg.

The bill contains $100 billion in grants aimed at freight projects meant to modernize commercial rail and cargo transport—with far-reaching implications for the vast number of companies that depend on moving goods and supplies.

The $65 billion tied to expanding high-speed internet provides sustained long-term growth opportunities in areas like 5G networking, cloud computing, data centers and communications towers. With more than 18 million Americans currently lacking broadband access, there’s also an untapped customer base for streaming entertainment services and e-commerce.

Industrials companies are poised to benefit from the $105 billion dedicated to water-related infrastructure, where governments will tap companies’ expertise to replace lead pipes, prevent water shortages and combat flooding.

There’s also a direct boost to electric vehicle (EV) makers, with $7.5 billion earmarked for a nationwide network of EV chargers and another $7.5 billion for low-emission buses and ferries. The EV industry extends beyond vehicles; communications and tech companies in the EV supply chain are poised to benefit, as are battery makers and lithium miners. Investors have taken notice—Tuesday’s IPO of fledgling Tesla rival Rivian was the sixth-largest ever on a U.S. exchange.

All of this will take time. It’s going to be many months, or years in some cases, before these projects are underway, which is not necessarily a bad thing given the current supply crunch and tight labor market. If the kinks in the global supply chain aren’t straightened out by the time shovels hit pavement, an onslaught of federal dollars could further contribute to inflation—something we (and central bankers) will be watching.

While there may be short-term volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. in any of the sectors that will benefit from the infrastructure bill’s broad reach, sustained investment in the country has the potential to yield growth for years to come.

Chart of the Week: 401(k) and Gifting Limits Raised for 2022

We monitor a wide range of data to form our outlook on the market and the broader economy—here’s one indicator our analysts have found informative.

By Director of Research Jeff DeMaso

One upside to rising prices is that they’ve prodded the Internal Revenue Service (IRS) to boost a few cost-of-living adjustments for tax year 2022. This means workers can save up to $20,500 in their company-sponsored 401(k) plansA 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account. There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn. next year (a boost of $1,000 over 2021), as you can see in the chart below. Those age 50 and older can make an additional $6,500 “catch-up” contribution, bringing their annual limit to $27,000. And while it’s not in the chart, the IRS also raised the annual gift limit to $16,000 from $15,000 and raised the estate and gift tax exemption to $12.06 million from $11.7 million. These moves give investors a leg up on saving for retirement and passing more of their wealth on to heirs.

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
Social Security’s Family Benefits

You don’t have to be retired to receive Social Security. You read that right. In certain cases, qualified family members and dependents can receive benefits. Let’s look at some of those cases and consider how they may factor into your financial plan.

Benefits for Spouses

If you are (or were) married, you may be eligible to receive up to 50% of what your spouse receives in Social Security. This option does not reduce or change what your spouse receives. Instead, it can maximize your own benefit if your spouse was the primary breadwinner while you spent some or all of your working years raising children or otherwise outside the workforce.

Depending on your work history, applying for spousal benefits may make more financial sense than filing for Social Security individually.

Spousal benefits start upon your spouse’s full retirement age (FRA)—66 or 67 depending on their year of birth. As with regular benefits, spousal benefits will be reduced by 8% each year if you file early. However, unlike traditional benefits, the spousal version will never grow beyond 50% of the primary breadwinner’s FRA payment, even if you wait until age 70 to file.

Benefits for Children

If you become eligible for Social Security benefits while you still have minor children, they may be entitled to receive benefits of their own when you file. To receive these benefits, the child must have a parent who’s disabled or retired and entitled to Social Security or a parent who died after working long enough and paying Social Security taxes. In addition, the child must be either:

• Under age 18
• Under age 19 and a full-time elementary or high school student
• Age 18 or older and have a disability that began before age 22

These are potentially significant benefits. We advise you to consider taking full advantage of them if your children are eligible.

Benefits for Survivors

If your spouse passes away, you may be entitled to receive their Social Security benefit upon FRA, assuming the benefit exceeds what you would claim based on your own work history. A widow or widower is eligible for survivor benefits as long as the couple was married for at least nine months at the time of the spouse’s death. If the surviving spouse is already receiving the spousal benefits mentioned above, they will automatically switch to survivor benefits once the Social Security Administration is notified of the death.

One important note: If the partner passes away and the widow or widower remarries before age 60, they are not eligible to receive survivor benefits based on their first spouse’s income.

For more about Social Security, please read our special report Social Security’s Role in Your Retirement or listen to our “When Should You File for Social Security?” podcast.

Social Security eligibility varies based on your circumstances. If you have questions about your specific situation, please contact us to receive personalized advice. As The Planner You Can Talk To, we’re happy to help.

Adviser Investments in the Media

Our thought leaders were in demand this week: Director of Research Jeff DeMaso appeared in Ignites to discuss the retirement of Gemma Wright-Casparius from Vanguard, where she oversaw $58 billion of active Treasury bond funds. Jeff was also quoted by RIABiz on the opening of Vanguard’s Advice Select series of funds, available exclusively through its Personal Advisor Services platform.

Meanwhile, Chairman Dan Wiener provided his perspective to Barron’s and Ignites on the bumpy launch of Vanguard’s Beacon app.

In this week’s Market Takeaways, Research Analyst Liz Laprade discussed the real reason Elon Musk is selling Tesla stock, while Vice President and Portfolio Manager Steve Johnson offered his thoughts on the value and virtue of health care stocks.

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 brings a number of useful reads, including the leading economic index, retail sales, a slate of key housing market gauges (homebuilders’ confidence, building permits and new construction) and two regional manufacturing surveys.

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, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., 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, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., 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.