Markets See Green Again

Markets See Green Again

March 21, 2022

Please note: This update was prepared on Friday, March 18, 2022, prior to the market’s close.

Despite widespread concern over the deepening humanitarian crisis in Ukraine, traders saw green again this week, just in time for St. Patrick’s Day.

On Wall Street, U.S. stocks mounted a powerful rally through Thursday, with the S&P 500 up almost 5%—on pace for its strongest weekly performance since November 2020. Not to be outdone, European bourses posted their best week in 14 months, and Hong Kong’s Hang Seng index had its best two-day gain in a quarter century on news that Chinese regulators might curtail the regulatory crackdown that’s muted its market.

Why this sudden streak of resilience? Some of it may be bargain hunting, with opportunists buying the dip. Another trigger is a possible reprieve at the pump: Oil prices plunged from $123 to $103 a barrel, returning to near where they were prior to the invasion. Oh, and the Federal Reserve finally stepped up its campaign to curb inflation by raising the fed funds rate by 25 basis points (0.25%), its first rate hike since 2018—much more on this below.

Friday’s markets, or next week’s, may not be quite as cooperative, but the whiff of optimism was welcome.

World events remain front of mind, as Ukrainian President Volodymyr Zelenskyy’s historic and heart-wrenching appeal to Congress from a bunker in Kyiv put into stark context the human, emotional and economic toll of this savage war.

Yet the week also offers a reminder of why we, and the fund managers we invest with, are being deliberate in our portfolio allocation decisions. Panic selling and relief rallies alike are short-term phenomena, and over- or underreacting to them can be detrimental to your long-term financial plan. Sometimes holding fast is the wisest choice.

We will continue to do what we’ve done since opening our doors: Remain disciplined and diversified, make adjustments as needed, and stick with our long-term tactical strategies rather than resort to short-termism.

Fed Hikes Rates, Takes a Hawkish Stance

The Federal Reserve raised interest rates by 0.25% Wednesday, its first hike since December 2018, as the central bank attempts to beat back generationally high inflation.

The move was no surprise, nor was the projection of future hikes—likely coming in six additional 0.25% bumps at each of the Fed’s remaining meetings in 2022. More striking was policymakers’ estimation of where the fed funds rate will be in a few years. The median forecast among the 11 members of the Federal Open Market Committee is for rates to rise to 2.8% in 2023. Not a single member was calling for a level that high even three months back; now, it’s a more hawkish consensus.

The Fed needed to pull out all the stops to keep the economy afloat two years ago, but with unemployment below 4% and inflation above 7%, it was only a matter of time before policymakers took this step to cool things off a bit. The emergency monetary support required during the pandemic is no longer appropriate.

Even though the uptick was expected, with change comes concern that the central bank’s actions could prove too extreme, tipping the economy into recession. And that’s certainly a risk. But as we see it, as of this week, the Fed has hiked rates just once by a mere 0.25%. Plenty of runway remains before the Fed can be said to have “gone too far.”

Do rate hikes always augur a recession or a sell-off? Historically, the central bank has started hiking rates in the middle of an economic cycle, with potentially years of gains remaining for stocks. In this case, the consumer-driven economy is too strong for supply to keep up, but that doesn’t mean modest growth can’t continue.

The unique exogenous shocks of a global pandemic and war in Europe will not make things any easier. But at this time, based on all of the data we consume, we are seeing few recessionary signals and many that point to further slow growth. We will continue to keep a close eye on economic data for any changes in trends that indicate portfolio adjustments are necessary.

Beating Back Inflation in Retirement

This week’s reader question: How can I build inflation into my retirement budget?

Andrew Busa, Manager of Financial Planning, had this to say:

Fortune may favor the brave, as they say, but we also believe it disproportionately rewards the prepared. So it goes with managing inflation in retirement.

When we create retirement spending plans for clients, we build inflation into the equation. We start with a standard 2.5% increase (where inflation has been hovering for decades) and then run alternate scenarios that account for higher inflation, generally 4%–5% or more. We use these what-if scenarios to discuss how sound planning can help make up the difference when inflation threatens to erode your spending power.

For instance, maximizing your Social Security benefits is an excellent initial step. You can elect to take Social Security beginning at age 62. But if you’re in good health and plan to continue working, it usually makes sense to wait until your full retirement age (between age 66 and 67, depending on when you were born) or even beyond. Every year you delay increases your benefit by 8% over the full retirement age amount, providing an additional cushion to fund your lifestyle. Even better, that higher benefit is adjusted for inflation each year. The cost-of-living increase for Social Security in 2022 was a record 5.9%.

Another best practice for beating back inflation in retirement is managing your portfolio accordingly. Yes, you can certainly buy inflation-indexed bonds like TIPS (Treasury Inflation-Protected Securities) or I bonds (Series I savings bonds), but there are limits and drawbacks to both. Or you can use annuities (ideally with an inflation rider) to generate guaranteed income. Regardless, we suggest fighting the tendency to become overly conservative and instead remaining invested in stocks. If all goes well, your retirement will stretch 30-plus years. The longer you benefit from the compounding interest of equities, the better. Staying invested in stocks will also help protect you from the effects of inflation.

Finally, be strategic with your retirement spending. Defer major purchases for a time if you are concerned about rising inflation, or consider finding a part-time job you enjoy. And remember to account for rising costs on absolute essentials like medication and other medical services, which tend to rise even faster than groceries and everyday expenses.

If you are retired or planning for retirement and are feeling nervous about rising inflation, we recommend you contact a trusted financial planner and review your plan.

Chart of the Week: After 2021 Lull, Volatility Is Back

We monitor a wide range of data to form our outlook on the market and the broader economy—every other week, we’ll spotlight one indicator our analysts have found informative.

Director of Research Jeff DeMaso By Director of Research Jeff DeMaso 

It takes courage to invest in markets as volatile as the ones we’ve recently experienced. So far this year, the S&P 500 has moved by 1.2% on average each day. While there are many trading days left this year, if this trend were to continue through December, it would make 2022 the fifth most volatile year since the index’s 1957 inception.

After last year’s smooth sailing, where the S&P 500 barely fell 5% from a prior high, this year has provided more of a challenge to investors. While it may seem irrational for the market to be jumping all over the place, I think it’s defensible. Investors haven’t had to contend with a European war and high inflation in decades. When you add the Fed raising interest rates to the mix, the uncertainty level rises even higher. As traders try to make sense of the moving landscape, prices will continue to bounce around day to day.

Your best defense as a long-term investor is to try and turn down the noise (this is often easier said than done). That doesn’t mean you stick your head in the sand and hope everything blows over. As a client of Adviser Investments, you never have to face volatile or uncertain periods alone—we’re with you every step of the way, keeping an eye on your portfolio for you.

Is the stock market acting normally?
Note: Chart shows average daily change for the S&P 500 index on an annual basis from 1/1/1958 through 3/16/2022.
Sources: S&P Dow Jones Indices, Adviser Investments.

Financial Planning Friday
Advanced Trusts: 4 Ways to Protect Your Estate

Traditionally, when we talk about estate planning tools, we focus on revocable trusts—an incredibly important and versatile wealth management tool. But that’s not the end of the story. In some cases, an irrevocable trust may be more appropriate for your needs. Today, we look at four types that can come in handy.

  1. Irrevocable Life Insurance Trust (ILIT). An ILIT is a trust that owns and controls your life insurance policy or policies. Think of it as a “middleman” that pays the premiums and distributes the proceeds. The upside of ILITs is that they shelter your beneficiaries from state and federal estate taxes owed on the insurance payout after your passing.
  2. Grantor Retained Annuity Trust (GRAT). GRATs help large estates manage the generation-skipping transfer tax exemption—$12,060,000 in 2022. More specifically, GRATs allow the grantor (the person funding the trust) to direct certain assets into an irrevocable trust and freeze their value, removing the additional appreciation from the grantor’s estate and minimizing estate or gift tax liability when the assets are passed down to heirs.
  3. Qualified Terminable Interest Property (QTIP). QTIPs can provide a surviving spouse with a lifelong income stream and allow the grantor to specify how the trust’s assets will be distributed when the surviving spouse passes away. But keep in mind: The income from the irrevocable trust flows to the surviving spouse free of tax thanks to the marital deduction, but the beneficiaries of that trust will ultimately pay estate taxes on the inheritance.
  4. Charitable Remainder Trust (CRT). Charitable bequests can reduce your taxable estate, but what if you need the tax deduction now? Enter the CRT—an irrevocable trust that potentially reduces your taxable assets and generates a predefined income stream for the donor or other beneficiaries, with the remainder of the donated assets going to your favorite charity at a specified time in the future. When you transfer cash or other assets into a CRT, you receive an immediate income tax charitable deduction based on the present value amount in the trust that will ultimately go to the named charity.

These advanced trusts require some assistance to set up. If you have any questions about securing your legacy, please do not hesitate to contact us—after all, we are The Planner You Can Talk To.

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
Buy Cash
Sell Fidelity MSCI Consumer Staples Index ETF (FSTA)

AIQ Tactical Defensive Growth
No trades this week.

AIQ Tactical Multi-Asset Income
Buy Cash
Sell Invesco Senior Loan ETF (BKLN)

AIQ Tactical High Income
Buy Cash
Sell iShares iBoxx USD High Yield Corporate Bond ETF (HYG)
Sell iShares 0–5 Year High Yield Corporate Bond ETF (SHYG)
Sell First Trust Tactical High Yield ETF (HYLS)
Sell Xtrackers Low Beta High Yield Bond ETF (HYDW)
Sell Franklin Liberty Senior Loan ETF (FLBL)

Adviser Investments in the Media

Chief Investment Officer Jim Lowell appeared on Fox Business with his analysis of the challenges facing the Fed, and Chairman Dan Wiener was quoted in InvestmentNews on the shareholder lawsuit against Vanguard after its alleged mismanagement of tax liabilities in its Target Retirement funds.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade explored the ins and outs of Amazon’s planned stock split, while Vice President Steve Johnson offered his thoughts on the resilience we’ve seen in the markets of late.

Looking Ahead

Next week, Federal Reserve Chair Jerome Powell will have an opportunity to further expound on his policy approach with his annual speech at the National Association for Business Economics conference. We’ll also get key reads on inflation, manufacturing and the service sector, durable goods, consumer sentiment and the final tally on five-year inflation expectations for March.

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 Investments 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, and have nearly 4,000 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 18, 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.

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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