Inflation Sparks Growth Concerns March 8, 2021 Weekly Update Print Please note: This update was prepared on Friday, March 5, 2021, before the market’s close. Last year’s bull market came roaring into 2021 with a head of steam but has since tired. The tech-heavy NASDAQ Composite, which gained more than 43% last year, slid briefly into correction territory after remarks by Federal Reserve Chair Jerome Powell failed to allay investor concerns about inflation. At the same time, the benchmark 10-year Treasury bond’s yield jumped to 1.54% and moved a bit higher on Friday. All of this is to say that Wall Street’s traders have once again turned pessimistic, at least for the moment. Investors, on the other hand, have stayed the course and, we believe, will be rewarded for their foresight. Consider the economic improvements we are now witnessing. While thousands continue to file for unemployment benefits on a weekly basis, their numbers are dropping and full-time employment is on the rise. The U.S. added 379,000 jobs in February, the second straight month of gains as states eased restrictions and restaurants reopened, rehiring workers they furloughed earlier during the pandemic. The unemployment rate fell slightly, to 6.2% from 6.3%. The improving jobs picture is a good omen for economic recovery. But even with the latest monthly gains, the labor market (and the economy at large) is still in recovery mode with about 9.5 million fewer people employed today than prior to the pandemic’s start. On a total return basis, this year, the Dow is up 1.4% through Thursday, while the broader S&P 500 index has gained 0.6%. The MSCI EAFE index, a measure of developed international stock markets, has returned 2.1%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.50%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 2.8% this year. Fed Fails to Reassure Traders Traders reacted badly after Fed Chair Powell gave an interview on Thursday in which he repeated that the central bank’s focus is on job creation while appearing unworried about the prospect of rising inflation. The Dow Jones Industrial Average sank more than 700 points at one point during his remarks, closing the day down 1.1%. In essence, Powell said the Fed is willing to let inflation run up a bit temporarily as long as it averages out around 2% over time. According to Powell, “there’s just a lot of ground to cover before we get to that [2%].” Why are traders so spooked? In the case of the bond market, the explanation is simple: When inflation and bond yields rise, it means bond prices fall, as new issues become more attractive to investors than existing bonds. And if inflation increases, the value of the interest payments received on older bonds decreases. As for the stock market, traders are wary that higher inflation may sink some of the growth stocks that led the market higher over the last several quarters. For our part, we think the Fed’s laser focus on jobs is the correct one. A labor recovery is key to sustained economic recovery. In the near term, the successful rollout of coronavirus vaccines is the most important component of increased economic activity. And the prospects here look good: As of now, we’re averaging 2 million shots a day into U.S. arms. But longer-term, if our economy is ever to grow unaided by massive stimulus, jobs matter the most. In the meantime, inflation has yet to rear its ugly head and the Fed has multiple means of combating it if necessary. Value Takes a Turn Improved prospects for reopening the economy and traders’ rising skittishness about inflation are helping to power the biggest shift in 2021’s stock markets so far: Tech stocks are having a short-term comeuppance while traditional value stocks have been shining. As we’ve said, no stock or sector outperforms all the time. After last year’s incredible rally, tech stocks were always likelier to slow down than continue to skyrocket, and it’s no surprise to see some of the sectors worst affected by the pandemic having a moment in the sun as the economy begins to return to normal. Chief Investment Strategist Charlie Toole covered our take on the growth/value divide two weeks ago. In our view, the best way for an investor to approach these cyclical shifts is to seek out the stocks and companies that excel regardless of whether they are considered “value” or “growth.” Berkshire Hathaway’s Charlie Munger put it succinctly in a recent interview: “All good investing is value investing. It’s just some people look for values in strong companies and some look for values in weak companies. But every value investor tries to get more value than he pays for.” Benefiting From the Hot Housing Market—Your Question Answered Our reader question this week is about high home prices: “How can individual investors benefit from the housing market boom?” Vice President and Portfolio Manager Steve Johnson responds: The housing market has been a bright spot in the economy during the pandemic. Prices are up and supply is down. Thanks to a declining inventory of homes for sale and historically low interest rates, the price of single-family homes in the U.S. has continued to rise, fueling a seller’s market. Note: Chart shows average housing price and average months of supply on a quarterly basis in the U.S. from Dec. 2014 through Dec. 2020. Source: The Federal Reserve Bank of St. Louis. One avenue available to individuals looking to profit from the housing boom is investing directly in properties and becoming a landlord (if you can afford it). Another is investing in publicly-traded REITs (Real Estate Investment Trusts). But note, a direct investment in properties often requires considerable time and capital. Meanwhile, retail and office REITs were hit hard by pandemic shutdowns and have not rallied along with the housing market. Suffice it to say, real estate is not something investors should approach lightly. However, there are some very straightforward ways that homeowners can help themselves in this type of environment without putting in much or any additional capital. With mortgage rates this low, homeowners who haven’t refinanced in a while should look into it. But don’t wait too long. The average rate on a 30-year fixed mortgage rose above 3% this week for the first time since July. While that’s still very low, interest rates are expected to move higher over the next few years. In addition, with rising prices, many owners today have significant equity in their home, making it an excellent moment to establish a line of credit for emergency use or to finance the cost of renovations and upgrades. For those of you looking to downsize your digs, like I am, now is an opportune time to sell to take advantage of those elevated prices. With rents on the decline, you can take your proceeds and rent while you decide which part of the country you may want to relocate to. (For the record, I’m not planning to move away from Massachusetts and Adviser Investments—I just don’t want to spend as much time mowing the lawn every summer.) Finally, many of us have children looking to purchase their first homes. With prices at such heights, this can be a daunting task. Consider gifting appreciated stock to your children, who may be in a lower tax bracket. This will save you money on your taxes while helping your children out. Also, inter-family loan rates are incredibly low. If you have the means this could be one of the best ways to “invest” in real estate in 2021. ***** Financial Planning Focus Early Retirement, Part 2: Health Care If you plan to retire from full-time work after you hit age 65, continuing your health coverage can be a snap—simply switch from your employer-based plan to Medicare. (For details, check out our podcast on Medicare planning.) But how do you handle health insurance if you want to retire earlier? Here are five options to consider: COBRA. The Consolidated Omnibus Budget Reconciliation Act (COBRA) allows you and your dependents to maintain health coverage under your employer’s plan for up to 18 months after you retire. Beware: Employers generally pay a large portion of the premium while you’re working, whereas now the entire expense will fall on your shoulders. And prices can be steep, especially if you have underlying conditions. We recommend finding out in advance what your employer pays so you can begin to budget for the increased premium. Health Care Exchange. If the 18-month COBRA window doesn’t bridge the gap to Medicare, securing coverage through the insurance exchange at gov is another option. When COBRA expires, you are granted a 60-day enrollment period where you cannot be denied coverage on the insurance exchange based on preexisting conditions. Some states, such as Massachusetts, offer their own exchange for health care plans. However, both paths are expensive. If you expect to use the health care exchange, check healthcare.gov preemptively to shop for a suitable plan. Spousal Plan. If you plan to retire sooner than your spouse, find out if you’re eligible to be included as part of a family plan through their employer. This can be a handy and cost-effective way to maintain health coverage before Medicare eligibility without purchasing an individual plan on the insurance exchange. Part-Time Work. Many retirees decide to take up part-time work after leaving their full-time careers. If you think this is a possibility for you, check what health benefits may come through your part-time employer. Retirement Package. While this avenue is far less common today than in the past, it is possible you may be eligible for health benefits in retirement through a past employer or union. (Teachers, civil servants and veterans sometimes receive benefits depending on the circumstances of their employment.) If this is something you may qualify for, we recommend making inquiries not just with your current employer but with past employers as well. Early retirement requires preparation. Health coverage is essential, but it can put a dent in your retirement budget. If this is something you’re considering, consider talking to a pro before you make your move. ***** 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 this week. AIQ Tactical Global Growth Sold iShares NASDAQ Biotechnology ETF (IBB). Bought iShares Core S&P 500 ETF (IVV). AIQ Tactical Defensive Growth No trades this week. AIQ Tactical High Income No trades this week. AIQ Multi-Asset Income Sold iShares JP Morgan EM Local Currency Bond ETF (LEMB). Bought iShares 1-3 Year International Treasury Bond ETF (ISHG). Adviser Investments’ Market Takeaways You can find two new Market Takeaways videos on our website. Research Analyst Liz Laprade discussed the difference between inflation and hyperinflation, and Vice President Steve Johnson made the case for time in the market over market timing. Looking Ahead It will be something of a thin slate for economic news this week, but we will get two reports on consumer sentiment, along with updates on inflation, wholesale inventories, producer prices and small business sentiment. 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. About Adviser Investments Adviser Investments 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, and have more than 3,500 clients across the country and over $7 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. Our minimum account size is $350,000. 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 Friday, March 5, 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. 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