When Will Inflation Make Like a Tree and Leave?

Inflation Sparks Market Action

October 13, 2022

Autumn leaves are drifting to Earth, but inflation is stubbornly clinging to the branch, giving Federal Reserve officials plenty of cover to hike the fed funds rate when they next meet in November.

The takeaway from the September inflation report: Prices have increased 8.2% across the board for consumers over the past year, according to the consumer price index (CPI). That’s a notch lower than a month ago. However, core CPI—which excludes changes in food and energy prices—increased 0.6% in September and is now up 6.6% over the past year. That’s the fastest pace of core inflation in 40 years according to this measure.

The stock market reacted right on cue: The S&P 500 fell to an almost two-year low midweek, followed by an impressive rally on Thursday. This just goes to show that some of the best and worst days in the market tend to cluster during bear markets—meaning even better days may be ahead. Remember, all bear markets end, and they are followed by bull markets. We will be positioned so we don’t miss out.

Here’s what else we’re focused on and why it matters:

  • With mortgage rates at a 16-year high and housing prices still elevated (though dipping slightly), mortgage applications hit a 25-year low. We’ll have an update on homebuilding and home sales next week, but it’s pretty clear that the housing market is cooling off.
  • Third-quarter earnings reporting season kicked off yesterday, with Pepsi raising its sales outlook for the remainder of 2022 based on customers’ willingness to keep sipping and snacking even as the company continues to hike prices. Meanwhile, Delta Air Lines reported record sales as business and leisure travelers returned to the skies amid climbing fares.
  • The dollar rose relative to other currencies this week after Treasury Secretary Janet Yellen signaled that she has no intention of meddling in the market. She described the greenback’s growing power as a “logical outcome” of the varied monetary policy approaches to the inflationary environment worldwide.

Chart of the Week: Recession? Not for the Job Market

Interim Chief Investment Officer Jeff DeMaso 

The textbooks would tell you that unemployment is a lagging indicator. The theory is that hiring and firing is costly. Employers resist firing workers in the early days of a recession—until things are so bad they have to. On the flip side, employers are slow to bring people back because they wait for the economy to be on stable footing before hiring. That’s the theory.

In reality, unemployment might be a leading (or at least real-time) indicator of a recession. By the time five of the last eight recessions (dating back to 1969) had started, the unemployment rate had already moved above its average level over the prior 12 months. (And in my book, I consider that five out of seven: COVID-19 was an exogenous shock that meant all bets were off.) That means that unemployment was rising before the start of most recessions.

According to this measure, we are not in a recession yet. The unemployment rate in September fell to 3.5% from 3.7%. And that’s below the average of 3.8% over the last year. Of course, this isn’t ironclad. Could we have a recession without unemployment rising materially? I suppose, but it would be strange to see economic growth contracting while employment is still high and consumers are earning an income and, presumably, spending.

Note: Shows the U-3 unemployment rate and its 12-month average since 1969. Recessions are overlaid in the gray bars. Sources: U.S. Bureau of Labor Statistics and National Bureau of Economic Research.

The IRS, RMDs and IRAs—Here’s the Latest

Manager of Financial Planning Andrew Busa

Just when you thought you had it all figured out, things changed.

Before the SECURE Act of 2019, non-spouse heirs could stretch required minimum distributions (RMDs) on inherited IRAs out over their lifetime. Now, inherited IRA assets must be distributed to beneficiaries at ordinary income rates within 10 years of the original owner’s passing. And if a trust is the beneficiary, the tax rate is even higher. (One solution: Keep the trust as a beneficiary and convert the IRA to a Roth IRA—future distributions are then tax-free.)

Then the IRS threw an additional monkey wrench into the mess: If RMDs from an IRA account have already begun, heirs will need to continue taking them in years one through nine based on the survivor’s life expectancy (as determined by the IRS’ Single Life Expectancy table). And the account must still be emptied by year 10.     

Now the new news. Earlier this month, the IRS released guidance indicating it will delay penalizing taxpayers for failing to take distributions in 2021 and 2022. The upshot: Be prepared to take an RMD before the end of 2023 in order to avoid a penalty. 

Again, this only applies to folks who inherited an IRA after the SECURE Act was passed at the end of 2019, and it only applies if the original account owner died after their required beginning date passed (meaning RMDs had already begun). If the deceased had not begun RMDs, a non-eligible designated beneficiary just has to make sure the account is empty by year 10. They don’t have to do anything in years one to nine. 

The 10-year rule does not apply to eligible designated beneficiaries (EDBs)—surviving spouses, children under 21 years old, disabled or chronically ill beneficiaries, or those within 10 years of age of the decedent. For EDBs, it’s as though the SECURE Act was never passed. 

Questions? Call us—we want to help. 

Webinar—Simplify and Save Money: Streamline Your Assets

If you think managing your financial life should be easier and less expensive, we’d encourage you to check out the replay of our recent webinar, Simplify and Save Money: Streamline Your Assets.

Join Vice President Dina Milne and Manager of Financial Planning Andrew Busa as they examine ways to streamline through the lenses of estate planning, tax strategy and portfolio management.

Why consolidate assets?

  • Improve your work/life balance in retirement
  • Coordinate RMDs more easily
  • Simplify estate planning and charitable giving
  • Reduce stress at tax time

Click here to watch to this on-demand presentation now!

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 financial planning, investment and economic fields every week, we know there’s still more that you might want to hear about. Ask us a question and one of Adviser’s wealth management or investment specialists will answer it in a future edition of The Week in Review. CLICK HERE NOW TO POSE YOUR QUERY.

Adviser in the Media

Portfolio Manager Adam Johnson appeared on Fox Business this week to discuss market volatility and opine on inflation and the upbeat labor market.  

In this week’s Adviser Takeaway, Andrew Busa covered the rule changes for inherited IRAs.

Looking Ahead

Next week, we’ll get key reads on homebuilding (builder confidence, existing home sales, building permits, housing starts), leading economic indicators, manufacturing and the Federal Reserve’s “Beige Book” of anecdotal economic reports from around the country.

As always, please visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser wish you a safe, sound and prosperous investment future.

About Adviser

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Please note: This update was prepared on Thursday, October 13, 2022, prior to the market’s close.

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