What the Jobs Picture Says About Recession

What the Jobs Picture Says About Recession

July 8, 2022

Journalists wore out their thesauruses this week scanning for new ways to say “recession fears.” Just about every market development under the sun—including the price of copper, skyscraper office vacancies, falling mortgage rates, steady oil prices, falling gas prices and fewer new job postings—was attributed to the prospect of an economic downturn.

This morning’s jobs report from the Department of Labor, however, shows the unemployment rate held steady at 3.6% in June, while the economy added 372,000 jobs—far exceeding analysts’ expectations and allaying a facet of recession fears for now. Markets rallied on the news before closing down slightly on the day.

That 3.6% figure keeps us near pre-pandemic levels—that is to say, close to historic lows. Such a number is not incompatible with the Federal Reserve managing to achieve the elusive “soft landing,” where inflation is tamed without triggering a recession.

It will be several months before we know if the U.S. economy has either entered or avoided recession. In the meantime, expect volatility as traders parse the up-and-down economic data. What’s important is to not let day-to-day bumps derail your long-term financial plan. Talk to us to be sure your risk exposure is aligned with your goals.

A Banner Year for Annuities

Andrew Busa Manager of Financial Planning Andrew Busa:

Do you hear that? It’s the sound of annuity salespeople everywhere cashing their bonus checks. Projected annuity sales for 2022 are in the neighborhood of $280 billion. That will surpass the previous all-time high of $265 billion set in 2008.

Annuities sales increase when the market is unsettled and interest rates are rising. But are all those billions of dollars chasing sound financial planning decisions?

Let’s be clear: An annuity is an insurance product. Period. It is not an investment.

Unfortunately, annuities are often billed as investment products first and risk management tools second. We encourage clients to view them the other way around.

Annuities and insurance each seek to cover opposing sides of the longevity-risk coin. Where life insurance hedges the risk that you’ll die too soon for your financial plan to succeed, an annuity hedges the risk that you’ll live too long for your assets to support your desired lifestyle.

When we discuss annuities with clients, there are several questions we always consider before making a move:

Will an annuity truly serve your needs? An annuity may be what you need if you are legitimately at risk of outliving your assets. (Again, it’s an insurance product.) As an investment, it doesn’t hold up well compared to traditional investment vehicles (mutual funds, stocks, bonds, etc.). Generally, if you are not in danger of outliving your assets even in the most volatile of market conditions, an annuity will only add complexity to a financial plan.

What are the total costs and fees associated with this product? One disadvantage of annuities is that they can be expensive. Costs to purchasers can include things like mortality and expense fees, administrative fees, investment management fees and fees for optional riders.

What is the surrender period? This is how long you must wait before incurring large fees on withdrawals.

What annuity income payment options do you have and when? This will depend on whether an annuity is immediate or deferred.

There are other important questions as well: What is the agent’s commission on the product? Does the insurance company waive withdrawal charges if you face a medical crisis?

The bottom line is that annuities aren’t inherently good or bad. Our job is to help determine if the pros of guaranteed income would outweigh the complexity, costs and risks of choosing annuities.

Chart of the Week: Bond Traders Expect Lower Inflation

Director of Research Jeff DeMaso:

Most of us are concerned about how long inflation will remain elevated. But the Fed’s army of Ph.D.s hasn’t had much success trying to forecast its rise or fall.

In the absence of a solid model for predicting inflation, I like to keep an eye on the difference between the yields on Treasury bonds and Treasury Inflation-Protected Securities (TIPS). (As a refresher, TIPS are securities that adjust their principle with inflation—if inflation goes up, your principle goes up and vice versa on the downside. This means that comparing the yields on Treasury bonds and TIPS with similar maturities can be used as an estimate of investors’ inflation expectations.)

For example, on July 7, the five-year Treasury bond yielded 3.04% while the five-year TIPS yielded 0.51%. Some simple subtraction shows the bond market was pricing in inflation of 2.53% per year over the next five years. That’s a good deal lower than the recent over-8% consumer price index reading and much closer to the Federal Reserve’s target inflation rate of 2%.

So, at least in the eyes of bond traders, inflation may come way, way down over the next five years. According to the Atlanta Fed, sticky-price inflation (or inflation of goods for which prices don’t change very often) clocked in at a little over 5% over the past year.

Only time will tell if the bond market’s five-year expectation proves accurate. But the U.S. bond market, accounting for roughly $18 trillion in investor dollars, is a place where a lot of people have a lot of money on the line—ample incentive to get this right.

Note: Chart shows the differences between the yields of five-year Treasury and five-year Treasury Inflation-Protected Securities on a daily basis from 6/30/21 to 7/7/22. Source: U.S. Department of the Treasury.

Reverse Mortgages—Can They Be Used for Good?

Reverse mortgages have a bad reputation—and not without reason. Tapping into your home’s equity to cover expenses may mean the home will need to be sold by your heirs to repay the loan. It’s not a step to be taken lightly, and for many retirees, it’s not one to be taken at all if they have other assets to draw upon.

But there are some circumstances in which even high-net-worth homeowners may benefit from a reverse mortgage. We’ll explain them below, but first, let’s define our terms: A reverse mortgage is a loan that allows you to access a portion of the equity in your home. Proceeds can be taken as a lump sum, doled out in the form of fixed monthly payments or held in reserve as a line of credit. Unlike most loans, you don’t pay a reverse back month by month. Instead, your loan is repaid down the road with proceeds from the sale of your home or your estate.

Most reverse mortgages are taken out under a federal program that protects homeowners from foreclosure if their home’s value declines. To qualify, you must be at least 62 years of age and have a large amount of equity in your home. Loan amounts are capped at $970,800 in 2022 for federally backed reverse mortgages.

If your home’s equity value exceeds that limit, you may qualify for a private, or “jumbo,” reverse. Jumbo reverses can unlock up to $4 million in home equity, and they may be available to homeowners as young as 55—but they come with steeper fees and fewer protections than federally backed reverses.

What advantages does a reverse have over the alternatives?

  • Unlike a home equity line of credit, you don’t need to repay the loan during your lifetime
  • Unlike distributions from your retirement funds or other investment accounts, reverse mortgage proceeds are tax-free

For example, a person who wants to age in place but needs to hire home health aides or make alterations to their property to do so may benefit from using a reverse to cover the costs—lowering their tax burden during their lifetime and allowing their investment portfolio to continue to grow. A reverse can also be used to pay off an existing mortgage, reducing your fixed monthly expenses during retirement.

Reverses may also offer arbitrage advantages in a rising-interest-rate environment. The total amount of equity you’re eligible to tap into will be determined when you apply to take out a reverse. Any portion of that amount that you don’t need right away will be available as a line of credit. Take out the reverse when rates are low and your available line of credit will increase as interest rates do, helping to provide an inflation buffer. (Note: Timing is crucial here.)

Two questions must be answered before taking out a reverse: Are you certain you want to stay in your home? And are you sure your heirs will not? Selling your home (or simply ceasing to use it as your principal residence) may trigger the repayment of the reverse mortgage. And if your heirs want to keep the property in the family when you pass, they’ll need to repay the funds from the other proceeds of your estate.

Reverse mortgages make sense in certain situations and are the wrong choice in many others. Call us before attempting to use this strategy—after all, we are The Planner You Can Talk To.

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.

Adviser Investments in the Media

This week, Chairman Dan Wiener spoke to Investor’s Business Daily about the handful of stocks that have managed to make a handsome profit amid the market carnage.

In this week’s Market Takeaway, Portfolio Manager Steve Johnson offered his thoughts on what market watchers are hoping to see once earnings season begins in earnest next week.

Looking Ahead

Next week’s a doozy: We’ll get important inflation updates, the first batch of second-quarter corporate earnings reports, the small business outlook, retail sales data, import prices, manufacturing and production reads, inventories, and consumer sentiment reports.

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.

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.


Please note: This update was prepared on Friday, July 8, 2022, prior to the market’s close.

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