Powell Tries to Soothe Troubled Markets - Adviser Investments

Powell Tries to Soothe Troubled Markets

August 30, 2021

Please note: This update was prepared on Friday, August 27, 2021, before the market’s close.

The devastating news out of Kabul made for somber headlines across the globe this morning, but from a market perspective, Federal Reserve Chair Jerome Powell’s virtual speech today was front and center.

Powell again reinforced that the Fed is committed to keeping interest rates low until employment numbers have returned to pre-pandemic levels. But he did hint that the Fed would begin to reduce its bond purchases (i.e., tapering) later this year—possibly in November. Wall Street traders apparently approved; stocks rocketed higher when his remarks became public.

Powell’s much-anticipated comments came after a week of mixed economic news. Manufacturing and service sector data suggests a slowdown may be underway. On the other side, durable goods orders were better than expected, existing and new home sales are up, second-quarter GDP was also revised higher (from 6.5% to 6.6%) and personal incomes rose far more than expected, ticking up 1.1% in July.

Do Our Eyes Deceive Us on the Recovery?

Anyone who’s spent a portion of this summer hiking in Maine or visiting Cape Cod’s beaches might have been struck by just how robust the economy appears—roads are busy, parking lots are full of pricey pickup trucks and people are flocking to restaurants. Adviser Capital’s home office is near Boston, and we see plenty of evidence of a strengthening recovery in our home region.

Our perceptions, however, might not match up too well with what many clients are seeing in other parts of the country. Large differences in population density, economic profiles, weather and, importantly, vaccination rates across the U.S. are translating into uneven levels of economic activity from region to region.

When you look at the national picture, our economy still has a lot of ground to make up. Compared to the 2019 numbers—that is, before the pandemic—20% fewer people are flying, 10% to 15% fewer meals are being eaten at restaurants, auto traffic is down along with public transportation usage and about 5 million people are still missing from the employment rolls. The lesson is that local perceptions may not reflect the national reality.

As much as we keep a watchful eye on employment and consumer activity, we remain convinced that it is earnings and interest rates that drive stock returns. And it’s here that what we’re seeing today may not be reflective of what’s coming down the pike.

We fully expect that earnings will continue to grow in the months ahead, though we are also certain that they won’t grow as fast as they have over the past year.

When it comes to interest rates, inflation is key. We expect inflation to remain elevated from pre-pandemic levels well into 2022. The factors that led to a sharp spike in inflation this year, such as supply chain entanglements, should continue to wane. But other factors, like housing costs, will still act to boost inflation figures.

We expect inflation to remain above 2% for most of 2022, but we believe it will settle into a range closer to 3%—not the 4% to 5%-plus band we’ve seen the past couple of months. However, if inflation keeps climbing, that could push interest rates higher and act as a drag on the economy and the markets.

Looking at the stock market, we’re still waiting for risk to return. Given the tumult of events over the past eight months, it’s remarkable that we have yet to see the S&P 500 decline even 5% from the more than 50 record highs it’s hit so far this year. That simply isn’t sustainable. Now is a good time for a gut check about the risk in your portfolio. Ask yourself this simple question: Could you withstand a 14% drop in your portfolio’s stock value and still sleep at night? That’s the average intra-year decline in the S&P, and we haven’t come anywhere close to that in quite a while.

China’s Bear Is No Panda

China’s ongoing crackdown on some of its most recognizable tech names has sent its stock markets into a tailspin. Year-to-date, there’s a roughly 40% gap in the performance of the S&P 500 and the Chinese stock market.

And the onslaught hasn’t let up, though value hunters seem to have put a floor under the recent declines. The Wall Street Journal broke news this morning that China plans to propose new rules that would ban companies with large amounts of sensitive consumer data from going public in the U.S. If such rules pass, many of the country’s biggest tech firms would no longer be open to investment from abroad.

We’ve discussed in depth the reasons behind China’s abrupt squelching of some of its highest-flying firms. These additional restrictions—especially considering that the Securities and Exchange Commission was already threatening to bar Chinese firms from being listed in American markets if they don’t come swiftly into compliance—certainly add weight to the argument against investing in China, given the regulatory risks.

The counterweight: China remains the world’s second-largest economy. Given China’s self-inflicted market wound, there’s reason to think that current prices could provide long-term values at a steep discount.

Podcast: Making Equity Compensation Work for You

Stock compensation isn’t just for CEOs anymore. But figuring out how to get the most out of stock options and awards can be tough. We can help. In this second episode of our series on equity comp, financial planners Andrew Busa and JonPaul McBride take an even deeper dive into the ins and outs as they discuss strategies that may help you maximize the benefits of restricted stock units and awards. They explore:

  • The differences between restricted stock units (RSUs) and restricted stock awards (RSAs)
  • How vesting schedules can impact your tax burden
  • The pros and cons of 83(b) elections as a tax strategy
  • …and much more

Equity compensation comes in many varieties. Listen to part one of our series to hear more about stock options, or consult our primer on equity compensation to brush up. Whatever form it takes, you’ll want to ensure you’re making the most of the opportunity equity compensation gives you. Click here to listen to today!

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Financial Planning Friday
Financial Planning for Thirtysomethings

Say goodbye to canned tuna and ramen noodles and hello to the appearance of a gray hair or three: As you enter your 30s, your near-term responsibilities and long-term obligations expand. Starting a family, contemplating homeownership and earning enough money to consider investing all come with the territory.

As you move into some of the most exciting years of your life, here are five tips to help you get started on the path to securing your financial future:

1. Don’t forget the fundamentals. Many of the same financial planning basics from your 20s still apply:

    • Have an emergency fund with six months of household living expenses set aside
    • Allocate at least 10% of pretax income to retirement through a 401(k) plan or other retirement savings vehicle
    • Build a healthy credit history (pay off your balance every month) and monitor your accounts for credit card fraud
    • Take advantage of all benefits available to you through your employer

2. Protect your assets. As your earnings and assets grow, protecting them becomes more important—and that means making sure you have adequate insurance. Disability insurance can help protect your salary if you are unable to work. And life insurance can help provide for your loved ones’ future if you pass away. For further guidance on figuring out how much insurance you should have, please read our article on life insurance and listen to our podcast episode on insurance needs.

3. Manage your debt. Whether you’re hoping to buy a home or simply struggling to pay off student loans, getting debt under control is a crucial component of budgeting for most thirtysomethings. One rule of thumb we like is the “36-28-20” method. The rule suggests keeping total debt below 36% of your total gross income, housing expenses (mortgage/rent/taxes/insurance) below 28% of your gross income and credit card debt and other loans below 20% of net income. (This can be more difficult if you live in an expensive city.)

4. Plan for the worst. If you were in an accident, who would take responsibility for making your health care and financial decisions? How would your car loan and mortgage get paid? If you have children, who would take care of them and would they have sufficient funds to do so? A proper estate plan will provide answers to these questions. Some resources you might want to consider include our Estate Checklist as well as our report and podcast episode on how to find the right estate attorney.

5. Keep dreaming big. Your 30s are a time to work toward your dreams. Whether that means owning your own business, sending your kids to college or ultimately retiring to a beach in Bali, this is the time to call in an experienced financial planner to customize a road map to help you achieve your lifelong goals.

These five tips are applicable to anyone in their 30s. But it’s also important to recognize that everyone’s situation is unique—that’s why we offer detailed financial plans to our clients at no extra cost. If you would like our help to make sure you or a loved one have checked the right boxes for a financial plan, please contact your wealth management team. We’ve got your back.

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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

No trades this week.

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical Multi-Asset Income

No trades this week.

AIQ Tactical High Income

No trades this week.

Adviser Investments’ Market Takeaways

In this week’s Market Takeaways, Research Analyst Liz Laprade discussed how younger investors are approaching the markets, while Steve Johnson pondered, “Can Chair Powell and the Fed thread the inflation needle?”

Looking Ahead

Next week we’ll pick up where we leave off this week—with the consumer in focus: Consumer confidence and ADP and nonfarm payrolls jobs reports are due to be released. We’ll also be looking at housing-related data (pending home sales, construction spending, home prices) as well as reads on manufacturing and service sector activity levels, factory orders and car sales.

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, August 27, 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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