Financial Insights- May 28, 2021

Written by Eric Ebbert CFP®, MBA

On May 28, 2021

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INFLATION – IS IT GOOD OR EVIL?

The Bureau of Labor Statistics recently released two carefully watched measures of inflation – the Consumer Price Index (CPI) and the Producer Price Index (PPI). Both showed marked increases, with the CPI rising 4.2% and the PPI rising 6.2% for the 12 months ending on April 30th. When the news first came out, the markets dropped about 1.5% (67 points for the S&P 500), continuing the slide from earlier in the week, begging the question; is inflation something to be scared about or cheered about? As is the case in many situations, it is a little of both. First, let’s try to put this into perspective. The year-over-year number comes while the economy was in the midst of a COVID-19 induced recession. Inflation measured from April 2018 to April 2019 was 2.0% and from April 2019 to April 2020 was 0.3%. If we add the three together, the average is 2.17%, or barely above the Fed’s target rate of 2%. We expect the headline number to continue to be high over the last year until later this year when the comparison numbers catch up.

Part of the reason for the spike in prices is because businesses cut back on inventory in the face of the pandemic. Now, as demand grows, companies must rapidly restock, putting upward pressure on prices. Once the supply chains are back in place, we should see prices moderate. But at least for now, there is inflation. It makes us feel good when we look at the value of our home increase, but not when building a home where wood and steel prices are very high. The Federal Reserve has said it will not immediately attempt to check inflation to make up for the meager inflation we have had over the past 12 to 15 years. A little inflation can be a good thing, especially coming out of a recession it is not unexpected. From an investor’s point of view, if costs increase, then moderate, it could allow companies to expand their margins, translating into higher earnings and benefiting the market.

We have stated in the past that wage inflation is generally permanent inflation and is the one indicator we pay more attention to than others. Businesses have job openings, but people are not applying for these jobs because many potential employees are making more staying home. Companies have started to increase wages to induce people back to work, and this is a concern. Stay tuned. One month does not make a trend.

 

EIGHTS WEEKS AND COUNTING

With all that is going on with the economy and the markets, little attention is being paid to the debt ceiling, an issue that Congress must face in about eight weeks. If they don’t increase the debt ceiling, the government will shut down. The Treasury might be able to buy a week or two by shifting things around. Still, with the lack of partisanship in Washington, something that should be “easy” isn’t. Current budget reconciliation rules prohibit amendments that increase the deficit and debt levels, implying that passage will require 60 votes (and at least 10 of those coming from Republican Senators) to adjust the ceiling. However, any original budget package submitted could increase the deficit and debt levels utilizing a simple majority vote. Got that? A bipartisan effort would be preferable, but the last thing we need for the economy and markets amidst a recovery is a government shutdown, even for a short period.

 

HOW INFLATION AFFECTS SOCIAL SECURITY AND RETIREMENT COSTS

Inflation concerns also lead to some projecting that Social Security benefits may rise more this year than they have in over a decade, perhaps by as much as 4.5%. It is fair to say that recent benefit inflation adjustments have not kept pace with inflation as the government uses a different methodology than the more widely used Consumer Price Index (CPI). According to the Senior Citizen League, which advocates for seniors, in their recent study 2021 Social Security Loss of Buying Power, since 2000, benefits have increased by 55% while expenses have increased by 102%. Here are the top 10 fastest-growing expenses faced by seniors, according to the report:

 

10) Annual real estate taxes from $690 to $1,494 – 117%

9) Gasoline per gallon from $1.31 to $2.86 – 118%

8) Ground chuck per pound from $1.90 to $4.31 – 127% (tie)

8) Propane gas per gallon from $1.01 to $2.30 – 127% (tie)

7) 10 pounds of potatoes from $2.98 to $6.98 – 134%

6) Annual medical expenses from $6,140 to $14,846 – 142%

5) Home heating oil per gallon from $1.15 to $2.86 – 150%

4) Annual veterinarian services from $109.30 to $285.18 – 161% (CPI-U data)

3) Homeowner’s insurance annual premium from $508 to $1,414 – 178%

2) Medicare Part B (doctors/testing) monthly premium from $45.50 to

$148.50 – 226%

1) Prescription drugs annual cost from $1,102 to $4,097 – 272%

It doesn’t come as any surprise that three of the top ten have to do with health care and that is not likely to change any time soon.

 

WOMEN FINDING THEIR FINANCIAL VOICE 

Women are notorious for not talking about money. Though they are interested in financial planning and wealth management, they are typically silent about financial topics due to privacy worries and lack of confidence. A Money Fit Women Study by Fidelity Investments indicates that only 47% of women feel confident when talking about finances with a financial professional – compared to 77% who would be comfortable discussing medical issues with their doctor. By staying silent, women face the unintended consequences of weakening their long-term financial stability. 

Here are a few tips women can use to find their voice and take charge of their financial lives: 

1.   Work with an advisor and develop a financial plan to improve your financial IQ and confidence. 

a) We recommend having a support team that not only invests and manages your money but answers the questions you want answered. A financial planner can help educate you on your current situation, identify your needs, and develop a plan to accomplish your goals.  Women who use financial planners are twice as likely to consider themselves on track in planning for retirement. At ProVise, we have a team of CERTIFIED FINANCIAL PLANNER™ (CFP®) professionals to assist your needs.

2.   Address issues that keep you up at night and commit time to learn the basics.

a)   The Fidelity study reveals that most women already have great self-discipline when it comes to saving for the future and can apply that discipline to investing. Many women are already running their family households and making most day-to-day purchases and budget decisions, so they are halfway there. Identify what you want retirement to look like and be diligent on ways to get you there. Start with what investing means to you and research methods to grow your portfolio based on your risk tolerance.

Working toward financial independence is empowering for women. However, it is not just about how much money you have but rather that you are confident in making your own decisions. Talk with ProVise to see how we can support you and help you find your voice.

 

SPACs: A LOT CAN CHANGE IN A COUPLE MONTHS

In April, we wrote about the explosive popularity growth in Special Purpose Acquisition Companies (SPACs). After a record number of new SPACs in 2020, we saw that record broken again in the first quarter of 2021 alone. While SPACs still represent the majority of IPOs in the U.S. this year, deal flow came to a halt in April. The SEC issued accounting guidance that would require all SPACs to revise past financial statements if the recommendation were to become law. The ruling would be a costly nuisance for companies that might not be sophisticated enough to implement it. More importantly, it exposed the fragility of the investment vehicle and has made investors question whether its assumed advantage over traditional IPOs – having a lower level of regularity scrutiny and the ability to move quickly – is indeed the case. 

Waning investor appetite has shown in SPAC’s recent underperformance. Since the mid-March highs, SPAK (the first ETF that tracks an index of SPACs) is down 20%, and some high-profile deals are now trading below IPO prices. Part of the underperformance can also be attributed to many of these being technology stocks, which tend to underperform in rising interest rate environments. Nevertheless, regulatory issues are unpredictable and often trump fundamentals. As we cautioned back in April, investors need to do their due diligence before investing in a SPAC. Beyond potential regulatory headwinds, it is essential to look for credible sponsors with a proven track record of sourcing attractive deals. As with all new or in-vogue investment products, tread lightly.

 

ODDS AND ENDS

The S&P 500 is a market-cap-weighted stock index. The larger the company, the more it impacts the index’s moves. At one point last year, the top five largest companies represented about 25% of the index. Here is another way to look at their influence – in mid-May 2020, the top five equaled the size of the smallest 323 companies. (Source: S&P)

Since the early 1980s, bonds have had a great run because interest rates have fallen. As rates decline, bond prices go up. However, in the first quarter of 2021, bonds with a maturity of 10 years or more declined 13.5% on a total-return basis, the worst quarterly performance since the first quarter of 1980, when the 30-year Treasury Bond yield started the year at 10.11% and finished the year at 11.98%. (Source: macrotrend.com) The 30-year Treasury Bond currently yields about 3.3%, up from 2.3% at the beginning of the year. (Source: US Treasury)

The top 1% of wage earners had at least $500,009 of adjusted gross income (AGI) in 2018. They had 21% of all income but paid 40% of all income taxes. (Source: IRS)