Please note: This update was prepared on Friday, October 22, 2021, before the market’s close.
The stock market is setting records again.
After a volatile early autumn, stocks rallied this week, driven by upbeat corporate earnings and possible progress in Washington’s infrastructure impasse.
The S&P 500 index closed at a record high on Thursday after falling 5.2% below its previous apex earlier this month. If you count dividends—and you should—the S&P hit new total return records on Wednesday and Thursday—its 57th and 58th of the year. The NASDAQ Composite index and the Dow Jones Industrial Average have also bounced back, though both remain just shy of their most recent highs.
If the current trend continues, 2021 will end on a very profitable note for stock investors. One word of caution, though. Most years when stocks are up 20% are not characterized by maximum drawdowns as small as 5.2%.
What else is trending higher? Inflation concerns. Thanks to supply chain kinks and sky-high energy costs, inflation is currently running north of 5% and expectations for sustained inflation are at their highest levels in over a decade, according to a gauge known as the “breakeven rate.”
Bond yields are also on the ascent. Since falling to 1.17% in early August, the 10-year Treasury bond’s yield has climbed to 1.67% this week, though it has yet to surpass the 1.75% yield seen at the end of March. Pricing in higher inflation means bonds are on track for their fifth yearly decline of the past 35 years. The last time bond prices fell during a calendar year was 2013 when the Bloomberg U.S. Aggregate Bond index was down 2.0%.
While yields were rising, the likelihood of tax hikes was sliding. President Biden said yesterday that Democrats may not have the votes they need to increase corporate taxes.
Who Needs Bonds?
Given their recent rocky ride—Vanguard’s Total Bond Market Index is on pace to record three consecutive months of negative returns—some investors have been asking why we continue to allocate portfolio assets to bonds. Since near-term inflation shows few signs of abating and the Federal Reserve seems committed to removing some of its support for the market, there’s a case to be made that bond yields will continue their upward trajectory and bond prices will continue their descent.
This means diversified, risk-aware investors may find themselves in a quandary. If a stock market correction comes in the next several months, investors could find both stock and bond prices, which typically move in opposite directions, in decline at the same time. In fact, investors got a tiny taste of this bitter pill in September, when stocks fell about 5% and bonds were down almost 1%.
It’s no surprise then that investors are asking: If bonds won’t be my buffer when stocks prices decline, do bonds even belong in my portfolio?
We continue to believe that they do—for several reasons. First, despite the handwringing played out in the media, September’s dual decline was hardly unprecedented. Looking over 50 years of stock and bond market returns, we find that about 15% of months are like September—with both stocks and bonds declining. So it’s not a common occurrence, but it’s not anything approaching an anomaly either.
That said, an individual month’s returns are hardly the best barometer for a long-term investor. Broaden the view a little and the overall picture changes dramatically. Looking at rolling 12-month periods since 1970—a span that encompasses the sharp inflation and rising rates of the 1970s and early ’80s—there were only five (or just 1%) when stocks and bonds declined at the same time.
Far more often, when stocks fell, bonds gained ground, performing their vital role as a portfolio shock absorber. To put some numbers behind that: Of 115 different 12-month periods when stocks declined, bonds rose 110 times, for a win rate of 95%.
While bonds have enjoyed a remarkable tailwind over the past four decades, they should not be seen as the main engine of wealth creation in a portfolio. We view bonds as a mechanism for wealth protection. And that’s a role we believe they still serve, even if interest rates are on the rise.
Chart of the Week: Americans Are on the Road Again
We monitor a wide range of data to form our outlook on the market and the broader economy—every other week, we’ll spotlight one indicator our analysts have found informative.
Sources: Adviser Investments, Federal Highway Administration.
Director of Research Jeff DeMaso: This chart compares the number of miles traveled in 2020 and 2021 with miles traveled in 2019, giving us one measure of whether the economy is recovering to pre-pandemic norms. In this case it almost has. We’re seeing similar trends in restaurant seatings and retail spending. While airline passenger miles have not recovered to pre-pandemic levels, 18-wheelers are on the roll and Americans are definitely hitting the road again.
Booster Shots, Market Shocks and the End of Fed Intervention—Webinar Recap
This week, in our live, interactive webinar, Adviser Investments’ team shared their views on the markets and what they expect for stocks and bonds in the coming months. Chairman Dan Wiener and Director of Research Jeff DeMaso offered their thoughts on the impact of rising yields, what it means when stocks and bonds are both falling, how supply shocks may be causing inflation and whether the end of Fed intervention could doom the bull market. Jeff also took a dive into how prior debt-ceiling debates and government shutdowns have impacted investors over the last several decades.
In our Q&A segment, Chief Investment Officer Jim Lowell, Vice President Charlie Toole and Research Analyst Liz Laprade answered participants’ questions on a gamut of topics. They addressed the role of bonds in a rising rate environment, the best sector weighting for today and whether persistent labor shortages and rising rates may mean we’re transitioning into a no-growth economy. Of particular interest for the crypto-curious, Liz gave her view on the role bitcoin and bitcoin ETFs might play in an investor’s portfolio.
To hear our experts’ answers to your most pressing questions about where we go from here, watch our Third-Quarter Webinar 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 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
5 Medicare Enrollment Mistakes
Since its 1965 inception, Medicare has been an essential component of a successful retirement. Yet, as we’ve noted, navigating its complexities can be frustrating.
Here are a few common mistakes to avoid:
- Opting for COBRA after retiring at age 65 or older. COBRA—the Consolidated Omnibus Budget Reconciliation Act—gives you the option to pay to keep your work health care plan for up to 18 months after you retire. It’s tempting—to a point. But once you celebrate your 65th birthday, you must enroll in Medicare, or other qualifying coverage like Medicare Advantage, to avoid future penalties. COBRA plans, which don’t qualify, trigger up to a 10% increase in your Medicare premiums for every 12-month period in which you fail to enroll. As a rule of thumb, we usually advise our 65-and-older clients to enroll in Medicare about a month before they retire to sidestep this issue.
- Contributing to an HSA after enrolling in Medicare. If you have a health savings account (HSA) option through your employer, be sure you take advantage—it’s one of the best and most tax-efficient ways to save for future health care costs. After you enroll in Medicare, however, contributing to your HSA is a no-go. That’s considered an “excess” contribution by the IRS and comes with a 6% penalty. You can, of course, continue to draw from your remaining HSA savings to cover prescriptions, vision care costs and co-pays even when you’re on Medicare.
- Not filing a Form SSA-44. Your annual Medicare premium is based on your adjusted gross income (AGI) from two years ago. (If you enroll in 2021, your premium is based on your 2019 AGI plus any interest received from municipal bonds.) So if you were a big earner pre-retirement, you might end up paying a high premium based on an income amount that no longer applies. Fortunately, filing Form SSA-44 resets the income clock to your post-retirement date. The SSA-44 can also be filed to request an adjustment based on loss of income from life events such as divorce or losing pension benefits.
- Visiting out-of-network providers on Medicare Advantage. Choosing the right Medicare policy is one of the most important decisions you have to make, as each policy has pros and cons. Medicare Advantage, for instance, can offer significant savings on your monthly premiums. Those savings evaporate, though, when you visit out-of-network providers. If traveling around the country (or the world) is part of your retirement journey, you may want to consider selecting a traditional Medicare policy along with additional Medigap coverage.
- Missing Medicare open enrollment. Medicare’s Annual Election Period (also known as open enrollment) runs from Oct. 15 to Dec. 7, and it’s the time to make changes to your existing prescription coverage or Medicare Advantage plan. Missing that window may leave you stuck with surprises like increased premiums, drug list changes or out-of-pocket cost increases. Set a calendar reminder now for next year to ensure that you’re on top of any updates to your coverage: New plans and potential savings enter the marketplace every year!
For more information on Medicare, check out our reference guide or podcast episode, Medicare Made Simple.
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.
AIQ Tactical Global Growth
Buy iShares Core S&P 500 ETF (IVV). Sell Fidelity MSCI Communication Services Index ETF (FCOM).
AIQ Tactical Defensive Growth
Buy iShares Core S&P 500 ETF (IVV). Sell Cash Reserves.
AIQ Tactical Multi-Asset Income
Buy Cash Reserves. Sell Fidelity Corporate Bond ETF (FCOR).
AIQ Tactical High Income
No trades this week.
Adviser Investments in the Media
Chief Investment Officer Jim Lowell appeared on Fox Business this week to discuss his outlook on inflation and consumer spending.
Director of Research Jeff DeMaso spoke to The Philadelphia Inquirer about why Vanguard’s board has moved to cut its retiree benefits.
In this week’s Market Takeaways, Research Analyst Liz Laprade discussed the launch of the first bitcoin ETF, while Portfolio Manager Steve Johnson offered his thoughts on investor optimism.
And remember, you can always visit the Adviser in the Media section of our website for the Adviser Investments team’s informative views on the market and the economy.
Next week will bring reports on home sales and prices, consumer confidence, spending and sentiment, and capital goods. But perhaps the most significant data will be our first look at Q3 GDP growth and a fresh update on inflation.
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, October 22, 2021, prior to the market’s close.
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