Please note: This update was prepared on Thursday, April 1, 2021, before the market’s close.
The economy is still suffering from some pandemic-related pain—the number of people filing for unemployment benefits rose last week and claims remain well-above pre-COVID levels—but the data also shows consumer confidence surging and manufacturers scrambling to meet increased demand, indicating a dawning economic recovery.
President Joe Biden was on the stump yesterday seeking to hasten the healing, unveiling a $2.3 trillion infrastructure plan centered on fixing roads and bridges, expanding broadband internet access and boosting manufacturing.
How will we pay for the shiny new bridges and pothole-free roads? Higher corporate taxes—though still not as high as prior to the Trump administration-led cuts. If passed, the infrastructure package will come on top of the $1.9 trillion pandemic-relief bill (with spending to be spread over eight years), exacerbating fears that inflation may become a factor in the months to come. We think those fears are misplaced, as we’ve said in prior notes. For the moment, inflation remains quiescent.
With interest rates still low and Federal Reserve policymakers on pause, the party on Wall Street is still going strong. The Dow Jones Industrial Average set a new record on Monday and the S&P 500 closed out March with its best month of performance since November. On a total return basis, the Dow is up 8.3% for the year through Wednesday, while the broader S&P index has gained 6.2%. The MSCI EAFE index, a measure of developed international stock markets, has returned 3.5%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.61%, up from 1.12% at the end of 2020. The U.S. bond market has declined 3.4% this year.
Bond Market Hits New Nadir
The economy has been bolstered by a much improved vaccine rollout this quarter, and while stocks have been strong, one major investment sector has taken it on the chin: Bonds. To pick but one example, Vanguard’s Total Bond Market Index fund is down 3.6% year-to-date, its worst three-month return since April 1994.
Following their August 2020 lows, bond yields have been rising with signs of economic stabilization and then recovery, and prices have fallen as a consequence. The pace of that decline steepened drastically in February as traders’ jitters over the prospect of rising inflation increased.
Since 1960, core inflation has averaged about 3.7% per year. Inflation today is less than half of that long-term average. Indeed, inflation numbers haven’t been close to their historical average for nearly 30 years.
This tells us that the only thing we have to fear from inflation may be fear itself: A generation of traders and investors who’ve experienced nothing but record-low inflation rates can spook easily.
We’re not so skittish. In fact, rising yields may ultimately benefit investors. After a decade with T.I.N.A. (there is no alternative) to stocks as the prevailing maxim for traders, higher-yielding bonds offer investors a choice and bolster interest in the defensive bulwark bonds provide against stock market volatility.
Canal Clear But Trade Still Blocked
Champagne flowed on Monday when rescue crews uncorked the Suez Canal, freeing the now-infamous container ship, the Ever Given. But while shipping has resumed in one of the world’s busiest waterways, we’re still far from the pre-pandemic normal when it comes to global trade.
Halfway across the world, the neighboring ports of Los Angeles and Long Beach are confronting a massive pile-up, with boats idling offshore for days before being cleared to dock and unload. The ports, which handle more than a third of America’s container imports, have seen increasing delays as producers race to restock shelves depleted during the pandemic.
These slowdowns at the ports and on the waterways come on the heels of other pandemic- and weather-related supply chain disruptions to trade across the globe, and experts estimate it may take until year-end to resolve bottlenecks.
Meanwhile, America’s cabin-feverish consumers are itching to get back to normal. New data on consumer confidence and demand for manufactured goods released this week showed both are surging far above analysts’ expectations, with many consumers saying they plan to make big-ticket purchases in the next few months.
You don’t need to dust off your Econ 101 textbook to see what that adds up to: Choked supply and surging demand could mean rising prices later in the year. We expect to see a temporary rise in inflation in the months to come. But we also expect it to be just that—temporary—as the economy returns to full production. And in our view, a little bit of inflation is a small price to pay for an economy that’s back in business.
Is a Correction Coming?
This week’s reader question is about the trajectory of the stock market: Are we due for a correction in 2021 and what (if anything) should I do differently to protect my portfolio?
Yes. We probably will see a stock market correction in 2021. But (and you knew there was a “but” coming, right?) that doesn’t mean you should do anything different with your portfolio. In fact, corrections—defined as a 10% or greater decline from a prior high—are quite common! Keep in mind that despite an almost assured pullback occurring at some point during the year, the stock market has delivered positive returns in about eight out of 10 calendar years.
In other words, market corrections are frequent but fleeting.
If we look back at the past 37 years for Vanguard’s 500 Index fund, investors experienced an average intra-year decline of 14% each year. Of course, some years the declines were much worse than 14%; others were more benign. Still, despite all those corrections, the index fund grew at a better than 11% annual rate—meaning investors doubled their money every six to seven years on average.
The stock market has been a compounding machine for long-term investors. The price we pay to earn those returns are the occasional corrections and bear markets. Rather than try to trade around each and every swing in the market—an impossible task—acknowledge that drawdowns happen and, with hindsight, present the best buying opportunities.
Ask us a question! We’re always interested in the topics or concerns you might 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 might 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.
Financial Planning Focus
Planning in Your 50s: Catch-Up Contributions
Turning 50 is momentous for so many reasons—including the extra boost you can provide to your retirement savings. We touched on this in Part One of our three-part series on financial planning in your 50s (and here’s Part Two on streamlining), but we think catch-up contributions are worthy of a little extra attention.
The Internal Revenue Service (IRS) allows investors to contribute to tax-advantaged retirement accounts up to a specified limit per calendar year. In 2021, that limit is $6,000 to individual retirement accounts (IRAs) and $19,500 to 401(k)s and other workplace retirement plans such as 403(b)s and Thrift Savings Plans. At Adviser Investments, we encourage all clients to make consistent contributions to these accounts every year.
But the truth is, many people don’t even come close to maxing out their retirement account contributions—especially in their younger years. And that can leave them lagging where they need to be as retirement approaches. That’s why the big 5-0 is such an important milestone: It’s when the IRS lets you start playing catch-up.
For most people, the 50s represent peak earning years. Making catch-up contributions to your retirement accounts can help you compensate for any deficit in your savings while still giving your investments a decade-plus to compound.
If you have the cash flow to max out your retirement accounts in your 50s and also make catch-up contributions on top of that, we highly recommend it. In 2021, the IRS allows anyone over 50 to contribute an additional $1,000 to an IRA and an additional $6,500 to workplace retirement plans.
What if you are already maxing out your 401(k) and IRA limits each year? Should you go beyond that? The answer depends on your individual situation. One rule of thumb is to aim to put 10%–15% of your salary toward retirement at this stage in your life.
Higher earners should note that phaseout and upper income limits may make you ineligible to take full advantage of a traditional IRA’s tax deduction or to contribute to a Roth IRA—but those limits do not prevent you from earmarking other taxable investments for your retirement.
We list those limits for tax-year 2021 on page 2 of our Key Financial & Tax Planning desk reference piece. And remember, the IRS has extended the deadline to make 2020 contributions for retirement accounts to May 17 this year, giving you even more time to catch up.
That said, don’t be overly concerned about hitting an arbitrary threshold. We advise our clients to save as much as they are reasonably able.
If you have questions about how much you should be contributing to your retirement accounts and whether you are on track for retirement, please contact your wealth management team. We’re happy to help.
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.
Sold Cisco (CSCO), Equinix (EQIX), Abbvie (ABBV) and Home Depot (HD). Bought Walmart (WMT), Honeywell (HON), Union Pacific (UNP) and Costco (COST).
AIQ Tactical Global Growth
Sold Invesco Dynamic Leisure and Entertainment ETF (PEJ). Bought iShares Core S&P 500 ETF (IVV).
Next week brings a relatively light slate of economic data. Still, we’ll be looking closely at useful reads on home prices, consumer confidence, manufacturing, construction spending, car sales and the March unemployment rate.
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 Thursday, April 1, 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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