Strong Jobs Can’t Revive Market’s Swoon

Strong Jobs Can’t Revive Market’s Swoon

May 9, 2022

This week has been hard on investors, with Thursday’s 1,000-point plunge in the Dow Jones Industrial Average making for especially grim headlines. Even short-sellers, who bet on falling prices rather than rising ones, had reason to reach for an antacid, with Wednesday’s nearly 1,000-point rally unraveling some bearish bets just before their potential payday. Whiplash, it seems, doesn’t discriminate. So far, 2022 is on pace to not only rank as one of the bond market’s worst years in modern history, but also as the S&P 500’s second most volatile year since its 1957 inception—the index has moved at least 1% either way on 51% of the trading days this year.

In a classic example of headlines chasing the markets, Federal Reserve bankers’ decision to hike the benchmark fed funds rate by 0.5% (as expected) was apparently responsible for both Wednesday’s rally and Thursday’s sell-off. The Fed’s move can’t be both good and bad for inflation, future corporate earnings or jobs—unless you need to sell ad space. Consider this a lesson in the futility of trying to explain every market move. Sometimes it just is.

While stocks and bonds are struggling, the labor market is not. Non-farm payrolls, which exclude farm workers, private household employees and nonprofit organizations, rose by 428,000 in April, the 12th straight month of job growth over 400,000. The unemployment rate held steady at 3.6%. Recession fears have been on the rise, but it seems unlikely we’ll slide into a recession when companies are so eager to hire.

Ultimately, both bond and stock traders will have to reconcile strong earnings and employment leading to expansion, with higher interest rates and inflation possibly sparking a recession. In the meantime, long-term investors are caught in the daily market rotations as optimism battles pessimism.

At Adviser Investments, we invest alongside our clients, so we know that as challenging as the past several months have been, the most important question for all of us remains whether we’re on course to meet our financial goals—and whether we’re comfortable with our current level of risk. Give us a call this week if you have questions or concerns; our team stands ready to help.

Can Alts Replace Bonds?

With the S&P 500 off more than 12% for the year through Thursday, and bonds down more than 10%, the classic, balanced 60/40 portfolio (60% invested in stocks and 40% invested in bonds) is once again under fire. Many analysts are now touting alternatives as the better option for a portion of the bond side of your portfolio.

So we asked the question: Would removing a 5% or 10% allocation from bonds and substituting it with an alternative strategy have improved recent returns? The answer: Not really, given the risks involved.

We looked back over the prior 12 months through April and substituted 5% of the traditional 60/40 portfolio’s bond allocation with a variety of alternatives. The best result came from a 5% allocation to an energy index fund, which would have reduced the 5.6% one-year loss for a standard 60/40 portfolio to -2.1%. Still a loss, but smaller.

What if you’d taken a bigger risk and allocated a quarter of that bond allocation—or a full 10% of the portfolio—to that energy index? Well, yes, over the last 12 months, you’d have eked out a 1.3% gain. Meanwhile, a 10% allocation to commodities would have netted a 0.2% gain. Swapping in various other “alts”—a market neutral fund, a mixed alternative fund and gold—still netted a loss, even at a 10% overall allocation. The decision to add a large slug of energy stocks one year ago would have been fraught, though.

Note: Chart shows 12-month and 2022 returns for a 60/40 stocks/bonds portfolio through April 30, 2022. Stocks represented by Vanguard 500 Index fund, bonds represented by Vanguard Total Bond Index fund. Portion replacing 10% of bonds represented by Vanguard funds Alternative Strategies, Commodity Strategy, Market Neutral and Energy ETF, respectively. Gold represented by the commodity, not a fund. Sources: Vanguard, Morningstar.

Looking at the same scenario since the start of 2022, rather than one year ago, the best alternative thus far was, again, a 10% allocation to energy stocks. This portfolio would’ve lost 7.6% in the first four months of the year. That’s less than the 12.3% decline of a traditional 60/40 allocation, but it’s not exactly a winning strategy considering the risk.

Strictly speaking, you would’ve been somewhat better off owning fewer bonds and more alts this year. But that outcome was far from certain. A traditional 60/40 portfolio already has exposure to energy stocks, and the intended outcome might not play out the same way next time. Many alternative investments are expensive, illiquid, complex and unpredictable—and not an even swap for bonds.

We never say never to putting an alternative asset class into a diversified portfolio, but there is a high bar to clear if we are going to sell a tried-and-tested investment for something that’s more speculative. Buying alternatives is far from a free lunch.

Chart of the Week: I-Bonds vs. TIPS—What’s the Best Choice? 

Director of Research Jeff DeMaso:

I-Bonds have gone mainstream—but are they the best option for fixed-income investors bedeviled by high inflation?

As we discussed in our recent primer, I-Bonds are U.S. government savings bonds that pay a rate of interest that adjusts every six months based on inflation. Right now, that rate is 9.62%.

Given that money markets, bank accounts and other savings vehicles are paying less than 1% and even 10-year Treasurys pay just 3% or so, that’s an incredible rate. But I-Bonds aren’t a total solution for the fixed-income portion of your portfolio. There are limits on how many I-Bonds you can purchase ($10,000 in electronic format), where you can buy and hold them, and when you can sell them.

And I-Bonds aren’t the only option for inflation protection. Unlike I-Bonds, Treasury Inflation-Protected Securities (or TIPS) have no annual purchase limit.

TIPS may seem like another obvious buy with inflation as high as it is, but they are not immune to rising interest rates. For instance, Vanguard’s Inflation-Protected Securities fund was down 6.1% year-to-date through Thursday—that’s better than Vanguard Total Bond Market Index’s 10.2% decline, but shareholders who expected the fund to keep pace with inflation have been disappointed.

The chart below compares the yields of these two inflation fighters over the past two decades. The yield on the 10-year TIPS is straightforward. For I-Bonds, we are showing the interest rate available at the time of purchase.

It’s clear I-Bonds deserve a place in your portfolio—if it weren’t for the purchase limits, I’d be hard pressed to recommend any bond other than an I-Bond today. But given the restrictions and the fact that what has gone up (the current yield) can also go down, I-Bonds may serve you best as a rainy day or emergency fund—though it takes time and planning to build that fund up.

Note: Chart shows interest rates at time of purchase for I-Bonds from May 2003 through May 2022 and 10-year Treasury Inflation-Protected Security yields from May 2003 through May 2022. Sources: TreasuryDirect.gov and The Wall Street Journal.

Financial Planning Friday
Planning in Your 50s: Catch-Up Contributions

Turning 50 is momentous for so many reasons—including the extra boost it can provide to your retirement savings.

The IRS limits how much you can contribute to tax-advantaged retirement accounts each year. In 2022, that limit is $6,000 to individual retirement accounts (IRAs) and $20,500 to 401(k)s and other workplace retirement plans like 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 retirement accounts can help compensate for any deficit in your savings while still giving your investments a decade or more to compound.

If you have the cash flow to max out your retirement accounts in your 50s and to make catch-up contributions on top of that, we highly recommend it. In 2022, anyone over 50 can contribute an additional $1,000 to an IRA and an additional $6,500 to workplace retirement plans.

One rule of thumb is to aim to put 10%–15% of your salary toward retirement at this stage in your life. 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.

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. Check out Page 2 of our Key Financial & Tax Planning reference to see if you run into those limits.

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.

Podcast: Your Questions Answered—Q1 2022    

You asked, we answered. During our recent webinars, we received so many questions (thank you!) that there simply wasn’t enough time to answer them all. Now we’re back with our investment experts to tackle these pressing topics, including:

  • Are I-Bonds a good fixed-income option in the current market?
  • When is the right time to go to cash, and where should you keep it?
  • Is tax-loss harvesting an option in this environment?

Investors have been on a rollercoaster so far in 2022. Jeff, Steve and Charlie will help you understand how to deal with the dips. Listen now to learn more! And if you missed them on the first go-round, click to catch up on our Quarterly Webinar and our special Bond Webinar, where we tackled even more of your questions while providing our outlook on the current market climate. Click here to listen!

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.

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.

AIQ Tactical Global Growth
Sell SPDR S&P Insurance ETF (KIE)
Buy Cash

AIQ Tactical Defensive Growth
Sell iShares Core S&P 500 ETF (IVV)
Buy Cash

AIQ Tactical Multi-Asset Income
Sell First Trust Value Line Dividend Index Fund (FVD)
Buy Cash

AIQ Tactical High Income
No trades.

Adviser Investments in the Media

Yesterday, Portfolio Manager Adam Johnson appeared on Fox Business to discuss the lack of consensus in today’s markets, and he appeared again today with a look at why this may be the market bottom.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade discussed the market’s trepidation ahead of the Fed meeting, while Portfolio Manager Steve Johnson offered his thoughts on Thursday’s “Sinko” de Mayo Sell-off.

Looking Ahead

Next week, we’ll be awash in inflation updates, with reports on April’s consumer price index as well as consumers’ inflation expectations. We will also get looks at wholesale inventories, producer prices, household debt and jobless claims.

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—and a happy Mother’s Day to all of the moms out there, whose total returns are unparalleled and incalculable.

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, May 6, 2022, prior to 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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