Financial Insights- February 28, 2022

PUTTING INFLATION INTO PERSPECTIVE

Two weeks ago, we mentioned that we thought inflation was the biggest potential problem for the economy and the market. First, it is an issue no one can deny has lasted longer and grown higher than expected only six months ago. Having said that, we need to put into perspective why it has the potential to slow as the year goes along. First, used automobiles are selling anywhere from 25-40% higher than historical averages and people are paying on average about $8,000 over sticker price for a new car/truck according to our sources. Once the supply issues are resolved, prices of both used and new cars/trucks should decrease in price. Two things will happen when this occurs. It will have a deflationary effect on the CPI, which would be a positive development for consumers. The negative is that people who are buying today and borrowing money may find themselves upside down a year or two from now.

Next, we have to talk about energy. In the broadest sense, the category has increased 27% in price over the past year and gasoline is up a whopping 40%. With economies around the world, especially here in the U.S., the demand is high. But can we expect these kinds of increases to continue? Probably not. Expect the oil producers to add supply because they do not want to see a recession which will lower demand. All of this could be upset by the Ukraine and Russia situation. 

Finally, we need to consider that food prices will likely continue their upward march of being up 7% in the past year. People have to eat so the pressure will still be there. The pace will still be high but should abate somewhat. However, people can make choices about what they buy. Maybe steaks give way to hamburgers. Pork loins to hot dogs. No longer buying processed/prepared food/meals as people buy raw ingredients and cook more themselves.

The comparison of prices will become more difficult to show continued high inflation unless, of course, you believe the next twelve months will be equal to or greater than the past twelve months. We don’t believe that will be the case. Wages are up a little over 4% over the past twelve months, which has taken a big bite out of the 7% increase in inflation. Make no mistake, we are concerned about inflation, but we need to put it into a proper perspective.

4Q CORPORATE EARNINGS RECAP 

With over 84% of the S&P 500 having reported earnings, we look back at fourth-quarter results. U.S. corporate earnings growth of 31% was considerably higher than analyst expectations of 21%, marking the fourth straight quarter of earnings growth above 30%. More than 75% of S&P 500 companies beat earnings estimates. With that said, the market hasn’t been overly rewarding. Companies that have reported positive earnings surprises have seen an average price increase of just 0.2% two days before the earnings release through two days after. This percentage increase is smaller than the five-year average price increase of 0.8% during this same window for companies reporting positive earnings surprises. Conversely, companies that have reported negative earnings surprises have seen an average price decrease of 2.8% two days before the earnings release through two days after. This percentage decrease is larger than the five-year average price decrease of 2.3% during this same window for companies reporting negative earnings surprises.

The reasoning behind the market rewarding positive earnings per share (EPS) surprises less than average and punishing negative EPS surprises more might be due to the forward outlook. Of the companies that have issued EPS guidance for the first quarter of 2022, 71% have issued negative guidance. This is the highest percentage since the third quarter of 2019. Street analysts also cut EPS estimates by 0.7% during January – the first decline in expected earnings over the first month of a quarter since the second quarter of 2020. The market may likely be reacting more to the negative earnings guidance and downward estimate revisions for the first quarter of 2022 than the earnings surprises being reported for the fourth quarter of 2021.

UKRAINE, RUSSIA, AND OTHER GEOPOLITICAL EVENTS

The world shook last week as Russian President Vladimir Putin ordered Russian troops into Ukraine. Oil went to $100 per barrel before settling at $93. All the major indexes were down as much as 3% before recovering to a positive 2% or more. But volatility isn’t over and certainly not in the short run. We tend to take a long view and thought you might like to see how markets reacted to other events of a similar nature. That said, past performance is not indicative of future performance.  (Source: Vanguard)

Event                               Initial Sell Off           6 months later           12 months later

1962 Cuban Missile               -5%                         +21%                          +26%

Crisis

1979 Iranian Hostage            -3%                          +3%                          +26%

Crisis

1979 Soviet Invasion             -5%                          +5%                          +26%

of Afghanistan

2003 Iraq War                       -3%                        +19%                          +27%

2014 Ukraine Conflict             -1%                          +8%                          +12%

2016 Brexit Vote                    -5%                          +7%                          +18%

SO, YOU WANT TO BE A MILLIONAIRE? 

According to Fidelity, the close of 2021 was a good one for 401(k) participants. The average balance grew to $130,700 and 40% of the participants increased their contributions, which was a new record. A record was set for the number of $1 million 401(k) accounts which came in at 442,000. There were 87,000 403b millionaires and another 376,000 IRA account holders with $1 million. Fidelity manages about 35 million IRA, 403(b), and 401(k) accounts. In further good news, about 83% of the 401(k) accounts had employer matches. In a growing trend, 37% of the employers use automatic enrollment which requires employees to opt-out rather than opt into the 401(k) plan. Most of these employers also automatically increase the percent going into the plan each year that gets each employee to at least a 5% contribution level.

WHY DO OLDER WOMEN FACE GREATER FINANCIAL HARDSHIP? 

The New York Times article “Why Older Women Face Greater Financial Hardship Than Older Men” identifies another discrepancy in financial stability: women spending less of their adulthoods in marriage. Though women are marrying later or not all, the article identified a major trend: “gray divorce” where people over age 50 get divorced.  

Dr. I-Fen Lin, a Bowling Green State University sociologist, noted that between 1990 and 2010, “gray divorces” doubled and represented one in three divorces in this country. Often, divorces in middle age have the potential to negatively impact a woman’s financial independence or, as the article states, “devastate their financial health.” 

One of the advantages of marriage is the financial partnership where you combine incomes and reduce living costs. As Dr. Matthew Rutledge, a research fellow at the Center for Retirement Research at Boston College, states in the article you “smooth out fluctuations, the job losses and the periods of disability, the years you took off to care for elderly parents” and it acts like an “insurance policy.”   

Women divorcing in this stage of their lives should re-examine or create a plan to address their new financial reality. Remember your retirement nest egg, especially in your 401(k) and IRA, will be cut in half. What about your income? Will you need to return to the workforce? If so, what are your job prospects, and do you have the necessary skill sets?

These are all important considerations, especially with Dr. Lin’s research showing that after gray divorce women’s standard of living fell by 45% compared to men whose standard of living decreased by 22%.

Do you know anyone who could benefit from our expertise in navigating these financial challenges?

PROVISE IS A BEST PLACE TO WORK

ProVise was named one of 2022’s Best Places to Work for Financial Advisers by InvestmentNews. We were chosen as one of this year’s top 75 based on employer and employee surveys delving into everything from company culture, benefits, career paths, and more. InvestmentNews partnered with Best Companies Group, an independent research firm specializing in identifying great places to work, to compile the survey and recognition program. “In a year that’s seen so much turmoil in the workplace – from mask mandates and canceled office re-openings to The Great Resignation – InvestmentNews is proud to spotlight those firms with a proven record of investing in their most valuable resource: their employees,” said Paul Curcio, executive editor of InvestmentNews. “We applaud this year’s finalists and wish them all the best in 2022.” 

To learn more about the InvestmentNews 2022 75 Best Places to Work for Financial Advisers, visit Bestplacesforadvisers.com.

IMPORTANT DISCLOSURE