The Main Event: Rate Hike Conjecture - Adviser Investments

The Main Event: Rate Hike Conjecture

June 21, 2021

Please note: This update was prepared on Friday, June 18, 2021, before the market’s close.

Stocks have been weak all week—meanwhile, bonds swayed and ultimately rose in price. The reason: What was billed as possibly the most consequential gathering of monetary policymakers in decades.

Traders hung on every word uttered by Federal Reserve Chair Jay Powell at his Wednesday press conference following the Fed’s most recent two-day confab, where expectations for future interest rate hikes moved from 2024 to 2023. Then, in a Friday speech, St. Louis Fed President James Bullard suggested that hikes could begin even earlier, in late 2022.

The biggest surprise might be the fact that despite the specter of rising interest rates, bond prices rallied. As we write this the yield on the benchmark 10-year Treasury is lower than where it was a week ago, not an outcome you’d typically see if traders thought inflation was getting out of hand.

In fact, one could see the bond market reaction to all this talk of rising interest rates as a vote of confidence that policymakers are on top of the situation and prepared to keep the economy moving forward.

All in all, so-so economic data and a diffident Fed was enough to send stocks into a swoon. On a total return basis, the Dow Jones Industrial Average is up 11.5% for the year through Thursday, while the broader S&P 500 has gained 13.2%, although they were off 1.5% and 1.3%, respectively, today. The MSCI EAFE index, a measure of developed international stock markets, has returned 10.9% through Thursday. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.53%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 1.9% year-to-date.

Does Fed Chatter Really Matter?

Fed Chair Powell called Wednesday’s meeting “the talking about talking about meeting”— recalling a statement he made in 2020 that policymakers weren’t even “thinking about thinking about” ending the stimulative bond-buying program or raising interest rates.

It was an apt way to tiptoe toward the day when the Fed will look to cool the economy and rein in inflation.

Here’s how we see it: The speedy pace of economic recovery in the U.S. coupled with what looks to be transitory inflation is likely to push the central bank to trim stimulus a little sooner than had been expected even a week ago. But we’re talking about a day fairly far in the future. In our opinion, this shouldn’t change anyone’s investment thesis.

And, believe it or not, inflation expectations fell on Wednesday—a sign that bond traders believe the Fed has the situation firmly in hand, thank you.

As we’ve suggested previously, we’re not worried about sharp and sustained inflation—though we’re certainly not blithely dismissive of it. While it can be hard to put a highly inflationary genie back in the bottle, policymakers are well versed in history and have proven eager to act to control price spirals. The current increase in prices has been fueled in part by the Fed, which can, and will, put the stopper back in the bottle before inflation runs rampant.

Growth Gains Steam

As the stock market was gyrating this week, it continued to demonstrate a reversal in the value versus growth dynamic—which hasn’t gotten a lot of attention in the media. Just when many traders thought it might be safe to go all-in on value, the growth factor has rebounded.

Over the past month, as inflation expectations have started to wane, so has value’s outperformance, with growth returning to the fore. For example, over the past 30 days or so, Vanguard’s SmallCap Growth Index fund is up 8.4%—which is 2.9%  more than its SmallCap Value Index fund. The gap is even greater among large-cap stocks—a full 5.1%. That’s a pretty clear shift.

Watching the Jobs Barometer

If you pay attention to market headlines, you may have noticed a familiar refrain in recent weeks ahead of each Thursday’s release of current unemployment claims data. The narrative is that the job market is improving, with economists and journalists predicting that new numbers each week will show a “post-pandemic low” in unemployment claims.

That made Thursday’s news a bit of a surprise—new filings for unemployment inched up rather than continuing to fall. Yet the running four-week average is still the lowest it’s been since the middle of March 2020.

Hitting a “post-pandemic low” is well and good, but it’s less impressive when you remember we’re comparing it to the labor market of last spring, when millions of Americans lost their jobs.

We keep a close eye on jobs progress as it can signal how the Federal Reserve, which is tasked with keeping employment high, may respond. In our opinion, it’s not a given that each week will bring better numbers. Our economic recovery has gotten off to a running start, yes, but it could run out of steam if we can’t continue to bring sidelined workers back into the labor force.

A Multi-Asset Approach to Tactical

With interest rates pinned at low levels, even the most cautious investors have delved into riskier assets in search of income. But taking on more risk in your portfolio can leave your nest egg exposed if the markets shift. In this episode of The Adviser You Can Talk To Podcast, Quantitative Investments Manager Josh Jurbala and Portfolio Manager Charles Toole describe how a tactical, multi-asset approach can help mitigate some of these risks. They cover:

  • Why investors may need to look beyond stocks and bonds in today’s markets
  • The role tactical asset allocation can play in helping to respond to different market environments
  • Why preparation outperforms prediction

With fears of inflation sparking market volatility, finding a safe harbor is harder than ever. Click here to listen now, or listen to part I and part II of our series on tactical investing, to learn more about how tactical strategies can help you navigate choppy markets.

Financial Planning Focus:

Life Insurance Made Simple

What separates successful investors from the rest of the pack? Knowing how to anticipate and manage risk. It’s a skill that’s even more important when it comes to securing your family’s future. That’s why life insurance is a cornerstone of many financial plans. Here’s a quick read on how to determine how much insurance you may need and the type you should buy.

How Much You Need

The purpose of life insurance is to replace the family breadwinner’s earning power if they pass away unexpectedly. The amount of coverage you should have depends on your family’s needs as well as your potential lifetime earnings.

The aptly coined acronym LIFE—liabilities, income replacement, final expenses and education costs—is a good guide for estimating how much life insurance you need.  

  • Liabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.).
  • Income replacement can be trickier. A comprehensive estimate anticipates variations in income over time—in some professions these may be steep. (A surgical resident might be expecting her income to climb sharply in a few years, for example.) But a useful rule of thumb is to multiply your current income by the number of working years you’d like your insurance to cover—10 years is a good starting point.
  • Final expenses include funeral costs and the legal fees necessary to settle your estate. A standard estimate is $50,000.
  • Education costs include college tuition and/or school fees if your children are privately educated. Several factors (such as current tuition, expected tuition, your child’s age and how much you plan to pay for) go into making a precise estimate. Fortunately, there are online calculators that can run the numbers for you. We like the ones from The College Board and Vanguard.

Adding up the four LIFE numbers can help you determine the amount of life insurance you should get to ensure that your beneficiaries won’t have any financial worries.

What Type to Get

Figuring out the size of the policy you need will help determine the type of insurance to purchase. If you need more than $1 million in life insurance coverage, “term life” insurance is generally the most cost-effective option. Term life means that the policy is only in place for a set period—usually 10, 20 or 30 years. When that term comes to an end, the policy expires, and you’ll have to purchase a new policy (or renew your old one) to continue the coverage.

“Whole life” or “permanent” policies have no expiration date. The policy runs from the moment you buy it until your death, and the amount your beneficiaries will receive is guaranteed. Those two conditions can buy considerable peace of mind—but it comes with a hefty price tag. Premiums for whole life policies can be 10 times as much as term life for the same individual.

Ultimately, the kind of life insurance you purchase should match your needs and situation. Since these will change over time, it’s a good idea to review your life (and disability, if you have it) insurance policies annually.


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

Bought Nike (NKE) and Wal-Mart (WMT) from Cash.

AIQ Tactical Global Growth

Sold Fidelity MSCI Financial Index ETF (FNCL); Bought Fidelity MSCI Real Estate Index ETF (FREL).

AIQ Tactical Defensive Growth

No trades this week.

AIQ Tactical Multi-Asset Income

Sold iShares Core US Aggregate Bond ETF (AGG); Bought iShares 20+ Year Treasury Bond ETF (TLT).

AIQ Tactical High Income

No trades this week.

Adviser Investments’ Market Takeaways

In this week’s Market Takeaways, Research Analyst Liz Laprade discussed when the Fed might be ready to take the punchbowl away, while Vice President Steve Johnson asserted that “bonds don’t lie” when it comes to inflation.

Looking Ahead

Next week, we’ll get a revision to first quarter economic growth (which currently stands at 6.4%), reports on manufacturing and service sector gauges, and data on capital and durable goods orders, new and existing home sales, as well as personal income, spending, savings, and sentiment.

As always, you can visit 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. 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 or call 800-492-6868.

Please note: This update was prepared on Friday, June 18, 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.

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