This Week in Review:
Is a Soft Landing Still Possible?
Since when is good news bad? On Wall Street of late, it’s when upbeat economic news heightens concerns that the Federal Reserve will hike interest rates and keep them higher for longer than investors would like. The market reaction to Fed policy has shown traders wavering between belief in a “soft landing” (where inflation is tamed without causing recession) and a “hard landing” (recession or economic stagnation).
A blowout January jobs report—517,000 new jobs created and unemployment falling to 3.4%, the lowest since May 1969—means the Fed may need to persist in its campaign against inflation. The narrative goes something like this: If (in-demand) workers win higher wages, businesses raise their prices to accommodate the increase in labor costs and inflation continues climbing. Ergo, the Fed keeps rates higher for longer.
Fed Chair Powell said Tuesday that the surprisingly rosy hiring figures demonstrate monetary policy takes “a significant period of time” to work its deflationary magic. And he doubled down on signaling that his focus is on long-term policy results rather than market appeasement. In other words, he’s not ready to call an end to higher interest rates anytime soon.
Here’s what else we’re watching this week and why:
- Accelerating used car prices during the pandemic served as a bellwether for both new car prices and broader inflation. And when prices slid (15% nationwide in 2022), it made a dent in the overall inflation numbers (used cars account for 4.5% of the consumer price index). Now prices are climbing again—up 2.5% in January from the month prior. The takeaway? Inflation is slowing but still rising in certain areas.
- What else rose recently? The trade deficit, which reached its widest gap on record last year. The trend illustrates the U.S. economy’s continued recovery, though elevated energy prices explain some of the rise because trade data is not adjusted for inflation.
- One bulwark against recession: State governments are flush, with cash reserve levels at an all-time high. (Unlike the federal government, 40 states are required to balance budgets annually.) Having that extra cushion means a lower likelihood of layoffs in the public sector and the potential for spending on job-creating projects and programs. All told, state and local governments account for 11% of spending in the U.S. economy and 13% of the nation’s jobs.
Chart of the Week: How to Hedge Against Inflation
By Charlie Toole, Vice President, Portfolio Manager
Inflation has been grabbing headlines for nearly two years. After a year like 2022, when inflation rates were at generational highs and stocks were dropping, many investors had the same question: What is the best way to hedge against inflation?
It’s popularly assumed that commodities and gold, two asset classes that were up in 2022, are key portfolio tools to offset a rising cost of living. While commodities and gold do well during inflationary periods, I favor a different inflation hedge: Stocks.
You’ll rarely hear anyone bring stocks into the inflation-hedging conversation, yet stocks have risen just as much as gold (significantly more, if you count dividends) since the U.S. dropped the gold standard in 1971. In the chart below, I show how stocks and gold stack up to the consumer price index (CPI) and the money supply, which is the total amount of cash, checking deposits and certificates of deposit (CDs) outstanding in the economy. (The money supply is one means by which economists gauge inflation’s impact.) Since 1971, the money supply is up more than 3,000%. CPI, the more traditional measure of inflation, is up 600% over the same time.
Investors have many options when it comes to protecting their wealth from rising prices—and it can make sense to do some mixing and matching in your portfolio. For most people, stocks are a great foundation for your inflation-hedging needs. If you have any questions about your strategy, please contact your wealth adviser.
Inherited IRA Q&A
By Manager of Financial Planning Andrew Busa, MSPFP, CFP®, MPAS®, CCFC
We’ve received numerous questions from clients lately about the rules for inherited IRAs and how they’ve changed with successive rounds of legislation. Here’s a roundup of some of the most common ones and our answers:
How did the SECURE Act impact inherited IRAs?
The 2019 legislation put an end to the “stretch IRA,” whereby individual retirement accounts could be passed along from one generation to the next, earning tax-free growth with few limitations. Instead, the SECURE Act implemented a 10-year rule for certain non-spouse heirs requiring the entire IRA account to be disbursed by the end of the 10th year following the original IRA owner’s death.
The 10-year rule does not apply to what are called “eligible designated beneficiaries” (surviving spouses, children under 21 years old, disabled or chronically ill beneficiaries, or those within 10 years of age of the decedent). Those folks can continue to stretch!
How does the IRS waiver change things?
In March 2022, the IRS threw an additional monkey wrench into the 10-year rule, suggesting that if the original IRA owner died before they were required to begin taking required minimum distributions (RMDs, which start on one’s 72nd birthday), then certain beneficiaries must empty the account in 10 years and take annual RMDs in years one through nine. This unexpected guidance caused quite a bit of confusion.
To alleviate the chaos, in October 2022 the IRS said that it was waiving penalties for missed 2021 and 2022 required payouts within the 10-year window. This seems to indicate that the proposed 10-year rule will not apply until 2023. That said, we expect to hear final guidance from the IRS on this topic sometime this year.
Yes, it’s complicated. This visual does a nice job of summing up the high-level rules.
What about “year-of-death” RMDs?
Regardless of the IRS waiver, if the original account holder needed to take an RMD in the year of their death and did not take it before they died, it’s the responsibility of the beneficiary to take it by Dec. 31 of the year the original account holder passed away.
Remember, eligible designated beneficiaries are not impacted by most of these rules. Beneficiaries who inherited before the SECURE Act went into effect can continue to “stretch.” Yes, there are a lot of nitty-gritty nuances. Luckily, you don’t need to sort through the rules or commit any of this to memory. Talk to your adviser today—our team is ready to help.
Next week brings ample useful data, including the latest reads on small businesses, retail sales, manufacturing, homebuilding, building permits, housing starts, leading economic indicators and inflation.
If you’d like to learn more about our tactical or fundamental strategies, please contact our team at 800-268-9046 or email@example.com.
Please note: This update was prepared on Friday, February 10, 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.
Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgments about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.
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. 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 Polaris Wealth Advisory Group. Opinions and statements contained in third-party articles are for informational purposes only; they are not investment recommendations.
© 2022 Polaris Wealth Advisory Group, an Adviser Investments, LLC company. All Rights Reserved.