Super Bowl, Fed Conjecture and Inflation

Super Bowl, Fed Conjecture and Inflation

February 11, 2022

Super Bowl LVI plays this Sunday, and while football fans may be focused on the Bengals-Rams matchup, at Adviser Investments we’re focused on price hikes. No, we’re not talking about the fact that the cost for a 30-second Super Bowl ad jumped 18%, to $6.5 million.

Inflation data released on Thursday showed consumer prices remain stubbornly high. This has led to growing worries over just how aggressive Federal Reserve policymakers will be in tackling the inflation issue and whether this will choke off economic growth in the process.

Conjecture concerning the Fed’s future actions rose to a fevered pitch following St. Louis Fed President James Bullard’s unscripted comments about the pace and size of future interest-rate hikes (he suggested they might come faster than previously stated). On Wall Street, the betting is…well, nothing is at long odds, as some prognosticators suggest up to seven 0.25% hikes over the coming year while others think short-term interest rates will rise faster, sooner. The over/under wagers on Fed action rival those placed on the Bengals and Rams showdown.

For all the handwringing over inflation, it’s possible that some of the agita is overblown and we may be seeing “peak inflation” now. The 7.5% annual climb posted in 2021 is indeed a multigeneration high. But month-to-month inflation paints a slightly calmer picture: Consumer prices rose 0.6% in January from the previous month—down from October’s 0.9% pace. In addition, the annualized numbers should look less dramatic in the coming months.

Higher interest rates can be seen as a reflection of economic growth and greater demand for capital. Consumers have thus far managed to weather price increases and businesses continue to post record profit margins. With nearly 70% of the S&P 500’s fourth-quarter earnings reports on the books, 78% of corporations beat expectations.

And while stock indices are down to start the year, we’ve seen plenty of companies posting strong gains on the back of strong earnings. This is not a market where holding a broad basket of stocks has paid off, which gives us confidence that the experienced stock-pickers in your portfolios (and ours) have the opportunity to navigate recent volatility with disciplined aplomb.

Market returns stock market investing

Flubbed Economic Forecasts

The Federal Reserve’s dual mandate is both keeping inflation under control and promoting job growth. Last week’s January employment report flummoxed economists, strategists and pundits alike. Consensus estimates called for a gain of 125,000 jobs in January, with estimates ranging from 400,000 jobs lost to a gain of 250,000. The actual number from the Labor Department came in at 467,000—almost double the highest estimate.

How could forecasters fumble so badly?

One reason for the “miss” may be that seasonal adjustments for ramped-up holiday hiring are throwing forecasters’ models vastly out of whack as our economy adapts to conditions like increased time spent working from home, limited schooling and shuttered service firms. In other words, COVID-19 is gumming up the works again. Due to pandemic-impacted data, you have to take every forecast thrown your way with a giant grain (or 467,000 small grains) of salt.

On that point, the other thing you may need to do is filter out the increasingly short-term thinking and opining in the media. Just this morning, an update blasted out by The Wall Street Journal claimed that “The S&P 500 is now on track for its worst weekly performance since mid-January.” Really? That’s what, four weeks? This kind of reporting silliness is of little use to investors, but it does serve to ramp up anxiety among those who haven’t put together a solid and thoughtful investment strategy. Our suggestion: Ignore this market static.

Give Up on Bonds…or Double Down?

Rising inflation and the prospect of higher interest rates have been a one-two punch to the bond markets this year—and some investors are asking, “Why own bonds at all in this environment?” You may be surprised to learn that there is a silver lining for bond investors even when interest rates are on the rise.

Let’s look at the last four periods when the Fed had a hand in raising interest rates: 1994 to 1995, 1999 to 2001, 2004 to 2007 and 2015 to 2019. Using Vanguard’s Total Bond Market Index fund as a proxy, the data shows that bonds returned 8%, 13%, 16% and 13% respectively over those periods (see the chart below, which we shared in our Jan. 21 update). That’s nothing to write home about, but it’s certainly a much better outcome than if you’d simply held cash.

Avoid Bonds When the Fed Is Hiking Rates?
Note: Chart shows fed funds rate and periods of tightening from 12/31/89 through 12/31/21. Bond returns during periods of tightening are those of Vanguard’s Total Bond Market Index fund. Sources: The Federal Reserve, The Vanguard Group, Adviser Investments.

As with every other investment asset class, bonds endure challenging periods. But that doesn’t mean they can’t do their job as a portfolio diversifier and safety buffer. Bonds dropped about 2% in 2021—that’s a bad year for the bond market, but it’s more like one bad trading session for stocks. And remember, when fund prices are slumping, every new dollar added into the market or reinvested in fund shares earns a higher yield. That’s a win.

For more on bonds, listen to our latest podcast, linked below, which answers a range of related questions from fellow investors.

Chart of the Week: Making Up for Poor Timing

Director of Research Jeff DeMaso By Director of Research Jeff DeMaso

I thought I was getting a jump on things by contributing to my nine-month-old son’s 529 plan at the start of the year. Then I caught myself thinking: If only I had waited a month or simply been a little slower to get my act together, I could’ve bought in at lower prices!

It’s a normal reaction, but ultimately the wrong one. Over the course of time—and in this case, I’ve got about two decades to go before the little guy heads off to college—these short-term timing frustrations barely register. What matters is that I’m putting that money to work in the markets.

To reassure myself (and you) that this is true, I looked back over the last 30 years and compared two investors. One invested $1,000 into Vanguard’s 500 Index fund each year on the last trading day of the year without fail. The other investor was quite unlucky and invested their $1,000 into the index fund at the high point each and every year. After 30 years, the year-end investor’s portfolio was worth more than $200,000. The unlucky investor’s portfolio? Nearly $193,000. That’s only a 4% difference in end value—not bad at all for 30 years of bad luck!

Long-term investment success is about spending time in the markets, not timing the market—and regular contributions to your account can take away the sting of buying just before one of the market’s periodic dips.

Investing discipline pays off
Note: Chart shows growth of a hypothetical $1,000 initial and subsequent annual $1,000 investments in Vanguard’s 500 Index fund from the end of 1991 through 2021 (sum of contributions in this scenario was $31,000). The year-end investor line was calculated by adding the $1,000 at the end of each year, while the ‘unlucky’ investor line was calculated by adding the $1,000 at the fund’s highest price each year. Sources: Morningstar, Adviser Investments.

Podcast: Your Bond Questions Answered

In the latest episode of The Adviser You Can Talk To Podcast, our panel of experts dig into the various ways to deploy bonds in your portfolio in a rising-rate environment. They respond to listeners’ questions as they discuss:

  • The role of bonds in a portfolio during periods of volatility
  • Why Fed hikes don’t always decimate bond returns
  • Whether TIPS are a good alternative to traditional bonds in the current market environment
  • Why muni bonds may be in better shape than you think

The returns from bonds in the next five years may not match what they were in past decades. But they still have a key role to play in your portfolio. Listen now to find out why.

Financial Planning Friday
Tax Tips for Switching ZIP Codes

In a previous post, we touched on the nuances of changing your domicile. Now, let’s take a deeper dive into tax advantages and financial considerations.

  1. Estate & inheritance tax. The IRS exempts taxes on estates valued at $12.06 million or less at the time of passing for individuals (a married couple has a combined exemption of $24.12 million). The state level is a different matter—the excluded amount can be far lower depending on the state. Eleven states levy the so-called death tax and five states impose what is called an inheritance tax. Maryland is the only state that carries both. If avoiding all estate and inheritance taxes is your objective, switching domiciles to a tax-advantaged state will boost your cause.
  2. Income tax. Eight states have no income tax, while 41 tax wage and salary income. (New Hampshire taxes just dividends and interest income.) Before relocating, it pays to cast a critical eye on the state’s tax code. But keep in mind: Some states with low or no income tax make up for it with higher property or sales tax. Be sure to research every facet of a state’s tax picture before moving. Better yet, consult a professional.
  3. Cost of living. Your dollar could be worth more or less depending on where you live. If you’re considering a move (or working remotely in a different state), check out this handy calculator on NerdWallet to see how far your dollar will go. Housing costs are the biggest variable, with transportation, food and entertainment also registering an impact.
  4. Remote work. The pandemic has created a situation where many people find themselves working remotely for a company headquartered in another state. In other words, your ZIP code has changed, but your work situation hasn’t. What does this mean for your taxes? Broadly speaking, you will owe income tax in the state you claim residency. However, states are aware of the revenue they are losing in the age of remote work. It’s become commonplace for the state you live in to grant a “credit” for the state where your company is based. Things can get tricky if you receive a 1099 from a company with state taxes that are higher than the state where you live. Our takeaway: Work with your employer to be sure the appropriate state withholding is taken from your paycheck and talk with your tax preparer to understand how remote work will affect your finances.

Any topics you’d like us to address in a future FPF section? Please contact your team or write to us at info@adviserinvestments.com. We’d love to hear your suggestions.

Ask Us a Question!

We’re always interested in the topics or themes 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.

Adviser Investments in the Media

Chairman Dan Wiener’s latest Vanguard views were featured in Barron’s. Meanwhile, Chief Investment Officer Jim Lowell appeared on Fox Business to discuss his view that the overheated economy is returning to normal and still growing.

In this week’s Market Takeaways, Senior Research Analyst Liz Laprade looked at what January’s crummy month for stocks means (or doesn’t mean) for the rest of the year, while Vice President Steve Johnson addressed bond investing in the face of rate hikes.

Looking Ahead

Next week we’ll get useful reads on inflation, manufacturing and productivity, the housing market (builders’ confidence, building permits, housing starts, existing home sales), leading economic indicators and the minutes from the Federal Reserve’s meeting last month.

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.

Please note: This update was prepared on Friday, February 11, 2022, prior to the market’s close.

About Adviser Investments

Adviser 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 www.adviserinvestments.com or call 800-492-6868.

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.

 ***

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. 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.

Adviser Investments, LLC has no relationship with NerdWallet.  This resource is referenced solely for your convenience. We do not guarantee your satisfaction or that the product or service will be suitable for your specific needs.

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.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.

Third-party publications referenced in this article (e.g., Citywire, Barron’s, InvestmentNews, CNBC, etc.) are independent of Adviser Investments. Readers should note that to the extent any third-party publication linked to in this piece also contains reference to any of the newsletters written by Dan Wiener or Jim Lowell, such references only pertain to the respective newsletter(s) and are not reflective of Adviser Investments’ investment recommendations or portfolio performance. Newsletters are operated independently of Adviser Investments. Opinions and statements contained in third-party articles are for informational purposes only; they are not investment recommendations.

The Adviser You Can Talk To Podcast is a registered trademark of Adviser Investments, LLC.

The Planner You Can Talk To is a trademark of Adviser Investments, LLC, registration pending.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2022 Adviser Investments, LLC. All Rights Reserved.


Please note: This update was prepared on Friday, February 11, 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.

Adviser Investments, LLC has no relationship with NerdWallet.  This resource is referenced solely for your convenience. We do not guarantee your satisfaction or that the product or service will be suitable for your specific needs.

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.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.

Third-party publications referenced in this article (e.g., Citywire, Barron’s, InvestmentNews, CNBC, etc.) are independent of Adviser Investments. Readers should note that to the extent any third-party publication linked to in this piece also contains reference to any of the newsletters written by Dan Wiener or Jim Lowell, such references only pertain to the respective newsletter(s) and are not reflective of Adviser Investments’ investment recommendations or portfolio performance. Newsletters are operated independently of Adviser Investments. Opinions and statements contained in third-party articles are for informational purposes only; they are not investment recommendations.

The Adviser You Can Talk To Podcast is a registered trademark of Adviser Investments, LLC.

The Planner You Can Talk To is a trademark of Adviser Investments, LLC, registration pending.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2022 Adviser Investments, LLC. All Rights Reserved.

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.