Is a Recession Likely?

Please note: This update was prepared on Friday, June 3, 2022, prior to the market’s close.

Two weeks ago, the S&P 500 index was nearly mauled by a bear—falling more than 20% from its January peak in intraday trading before closing down 18.6%. Through Thursday, it clawed back 5.3% of those losses.

It’s too soon to say if we’ve seen the bottom in this market cycle or if we are in for more volatility and market declines in the short term.

Today’s jobs report showed the economy added 390,000 jobs in May, well above consensus expectations of 328,000 but breaking a 12-month streak of more than 400,000 hires. That figure suggests a slight cooling in the red-hot labor market, with the unemployment rate staying steady at 3.6%. Somewhat slower hiring could ease upward wage pressure.

That said, the stronger-than-expected jobs report may reinforce investors’ fears that the Federal Reserve will need to keep its foot on the interest-rate pedal for some time to battle inflation back down to its 2% target.

In our view, the more salient question is whether the U.S. economy will slide into recession. The worst bear markets have occurred around recessions, but not every bear market is associated with an economic recession. And those non-recession bear markets have historically been less severe.

One broad measure we follow, the Federal Reserve Bank of Chicago’s National Activity Index—which combines 85 indicators into one metric—says the economy is growing. Yet U.S. GDP contracted in the first quarter (after inflation). Granted, GDP is backward-looking while the Chicago Fed’s national activity index is designed to be forward-looking.

Our hypothesis is that we are currently in a non-recession bear market. However, future economic growth is tied to inflation and whether it recedes in the coming months. And with so much of the recent spike in prices outside of the Fed’s control—Chair Jerome Powell can do many things, but he can’t order Russian tanks to retreat or Chinese cities to reopen—the future of inflation in the U.S. remains to be seen.

The Fed’s Elusive Soft Landing

For most of May, Wall Street sentiment supported the narrative that the Fed’s interest-rate hikes would stall growth and send the economy hurtling headlong into a recession. But a few data points from last week brightened investors’ outlook (somewhat), supporting the idea that the Fed may indeed manage a “soft landing” of lower inflation and a still-growing economy.

The most significant data point, the personal consumption expenditures price index (PCE)—the Fed’s favored inflation yardstick—increased 0.2% in April, indicating that prices are up 6.3% over the past 12 months. That’s a step in the right direction, as the PCE increased 0.9% in March, suggesting prices were up 6.6% over the prior year.

Not only is inflation slowing, but consumers continue to spend. Adjusting for inflation, consumers spent 0.7% more in April than March. As we’ve said before, the consumer is the engine of the U.S. economy.

Unsurprisingly, traders seem to be responding positively to the prospect of slowing inflation. In addition to the stock market’s rally, the bond market has steadied. For investors holding balanced portfolios, this means bonds are once again acting as a buffer against stock market declines. In the first four months (and one week) of the year, stocks and bonds fell together on 27 trading days. Since the first week of May, stocks and bonds have declined in tandem on only one trading day—May 31. We expect that more recent trend to continue.

The landing pad for the economy is still a long way away—and we can’t rule out more turbulence to come—but the prospects of avoiding a crash seem brighter this week than last.

Chart of the Week: Consumers Expect Higher Inflation—Will They Be Right?

Director of Research Jeff DeMaso:

Filled up on gas lately? Then you know: Inflation has been hurting consumers. What makes the recent bout of rising prices so irksome is that it was largely unexpected.

For nearly a decade, the New York branch of the Federal Reserve has been asking consumers how high they think inflation will be over the next year. As you can see in the chart, respondents have typically predicted it would be around 3%. And until recently, they were, for the most part, overshooting the target—from 2013 through early 2020, inflation averaged 1.5%.

That all changed coming out of COVID-19 shutdowns, with demand rebounding while supply chains fell apart. A war in Europe and lockdowns in China only made the situation worse. Coming into 2021, consumers were still expecting inflation of around 3%. But that year’s inflation clocked in at 7%. Consumers weren’t just hit hard. They were sucker-punched.

Now they’re adjusting their thinking on inflation. As of April (the most recent results available), those surveyed by the New York Fed now expect to see inflation of 6.3% over the coming year. Will inflation come down to meet their expectations or will consumers again be surprised by price hikes?

Only time will tell, but some policymakers have expressed the opinion that inflation has peaked.

Your Financial Plan
Choosing the Right Trustee

Trusts can protect your assets and transfer wealth to family members and charitable causes. But the efficacy of a trust depends largely on how well it’s managed.

For a revocable or living trust (where assets remain in your control and terms can be altered), ensuring the funds remain in the right hands is simple: Designate yourself as the trustee. Irrevocable trusts (or revocable trusts whose grantor has passed away) are a different story—you need to appoint an outside trustee.

You’ll want to select someone trustworthy, prudent and agile enough to respond to your beneficiaries’ needs promptly over the course of their lives.

Here are four questions to answer to help you choose the right trustee.

What does the trustee do? Trustees have the power to make investment decisions and manage businesses or real estate held in the trust. They are also responsible for filing tax returns and distributing payments to beneficiaries. A trustee is legally liable for their actions—they’ve got skin in the game. In short, being a trustee can be a full-time job, so whomever you pick should understand the commitment involved.

Do you need a professional trustee? The answer depends on your estate and your beneficiaries. Professional trustees can include a financial institution, like a bank, or advisers with significant trustee experience. These seasoned trustees have the resources and technical know-how to properly administer trusts, and they help provide continuity, objectivity and operational experience—especially when serving several generations of a family. The downside of hiring a professional trustee is that they may be less familiar with the needs of your family and less flexible when making distribution decisions.

The other option is to choose individual trustees—typically family members or friends whom the donor trusts to understand and carry out their intentions. Family trustees may need to engage outside investment advisers and other professionals to fulfill their duties. If you have an individual trustee in mind, it may make sense to also appoint a professional co-trustee to lend a hand.

What is the trust’s time frame? Trusts can be set up to last for decades. Or they may terminate upon the passing of a spouse or child. If you’re setting up a trust to benefit several generations, you may need to select a professional institutional trustee to ensure continuity. But even if you intend the trust to dissolve in the short or medium term (say, when a minor child becomes an adult), it’s still wise to provide instructions on how the trust’s beneficiaries should select (or worst case, remove) trustees if your designated trustee resigns or becomes incapacitated.

Will the trustee be paid? Trustees are legally entitled to reasonable fees for their services—professional trustees will often have fee schedules. Generally, the more complex your trust is to administer, the higher the fees. If your trust is relatively simple, with few beneficiaries, an individual trustee might be a better option. Their fees may be lower or even limited to the expenses that they incur for their work on the trust.

Naming a trustee who is knowledgeable, reliable and able to navigate your family’s dynamics should ensure that your goals are achieved and your heirs are cared for as intended.

Big News: We’ve Appointed a New CEO                                                                                                 

Chairman and Co-Founder Dan Wiener

After a lengthy search, I am thrilled to announce that Mario Ramos has joined Adviser Investments as our chief executive officer.

I first met Mario last summer when, over a terrific dinner, we got to know one another and our collective thoughts on both family and business. I knew then and know now that Mario is precisely the right person to lead Adviser Investments as we forge a future that continues to put you, our clients, at the center of everything we do.

Mario has served in many executive and investment banking roles over his career—including as chief financial officer and chief risk officer of Edelman Financial Engines, a financial advisory platform with more than $250 billion in client assets. He also spent six years at consumer health giant CVS, culminating in the role of CFO of CVS Caremark.

Needless to say, Mario knows how to lead a client-obsessed organization such as Adviser Investments.

Even more important to me: Mario shares the values that have guided us from the beginning. He’s driven to deliver the best personalized care and customized services in the industry to our clients while fostering an environment where the best employees in the business, like your wealth management team, can flourish.

As a four-year NCAA Division I soccer player, Mario is all about the “team.” I’m very glad to have Mario leading the team here, and he and I will be working closely together. Rest assured, I’m not going anywhere, nor is anyone else on your wealth management team.

As always, thank you for your trust and support. If you have any concerns, please don’t hesitate to contact me.

Podcast: Keeping Credit on Your Side

Credit cards are ubiquitous. But they can also be pernicious. Even financially savvy consumers can find themselves tripped up by some of the terms and jargon. Luckily, financial planners Andrew Busa and Michael Dillaire are here to help. In this episode, they demystify the impact of revolving debt (like credit cards) on your financial plan, discussing:

• Taking advantage of your perks
• How many credit cards is too many
• The ins and outs of credit scores
• How to tell what card is best for your situation

Your credit cards can provide a clear window into your overall financial health. Let Andrew and Mike help you make the most of this everyday financial tool. Listen now to learn more!

Ask Us a Question!

We’re always interested in the questions you have and the topics or concerns you’d 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 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.

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

AIQ Tactical Global Growth

AIQ Tactical Defensive Growth

AIQ Tactical Multi-Asset Income

AIQ Tactical High Income

Adviser Investments in the Media

This week, Portfolio Manager Adam Johnson spoke to Fox Business about the return of FOMO and whether the Fed’s responsible for the recent rally.

Meanwhile, Citywire, the Boston Business Journal, Citybiz and Barron’s all covered the appointment of Mario Ramos as CEO of Adviser Investments.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade discussed what we learned from the World Economic Forum, while Portfolio Manager Steve Johnson offered some sage advice for young adults graduating from high school and college.

Looking Ahead

Data-wise, next week’s focus will be on prices, with a fresh update on the consumer price index, along with inflation expectations and consumer sentiment. We’ll also get other insights into Americans’ pocketbooks, with updates on household wealth, debt and consumer credit.

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, 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.