Financial Insights- October 15, 2021

3Q CORPORATE EARNINGS PREVIEW

Some of the major banks have kicked off the third-quarter corporate earnings season and results have been impressive. With that said, analysts’ expectations are high and top-line revenue beats are being drowned out by concerns over wage inflation and supply chain disruptions. Earnings are expected to grow 28% over last year’s earnings in the third quarter – that’s down from 92% growth reported in the second quarter, which is likely the peak for earnings growth this economic cycle. Some of the highest growth is expected to come from energy, industrials, and materials while consumer staples and consumer discretionary are relative laggards and utilities are the only sector expected to post negative earnings growth.

Consumer price data for September reflected the stubbornness of “transitory” inflation and there continues to be a large gap between job openings and the unemployed labor force. While it’s still early in this quarter’s earnings season, over two-thirds of companies that have reported are citing the negative impact of supply chains on their investor calls. Excess savings and pent-up demand have allowed companies to pass on higher prices to consumers for the time being, but an extended period of rising prices will eventually stifle economic activity. We expect manufacturing and transportation logistics to be sorted out long before that impasse but are positioning our investments for inflation (and eventually, interest rates) that surprises to the upside.

PRODUCTIVITY IS ON THE RISE

The Gross Domestic Product (GDP) of the U.S. surpassed its pre-pandemic high earlier this year. It did so while there were still five million people not working that were working before the pandemic. How is that possible? The answer is the increased productivity of those that are working, leading to greater profits and eventually higher wages as businesses can do more with less, which in turn tamps down inflation. Productivity in America has been waning for years, but the pandemic forced businesses to adapt. Working remotely may not be the norm going forward for most businesses, but some hybrid form of remote work could be here to stay. Businesses were forced to look at upgrading their use of technology. Artificial intelligence is being used to review credit applications, tax work, and many other applications, thereby replacing work that previously had been done by people. Robotics has been in the manufacturing space for a long time, but their application is spreading throughout many non-traditional robotic jobs. Once again, necessity is the mother of invention.

INFLATION – YES… STAGFLATION – NO

The latest inflation report came out earlier this week and that transitory inflation isn’t ending as quickly as many predicted. The September increase in the Consumer Price Index (CPI) was 0.4% and the core index that excludes food and energy was up only 0.2%. The CPI increased 5.4% year-over-year which is the largest increase in the last 13 years just before the Great Recession. Leading the way were increases of 3.2% for shelter (home prices, rents, etc.), 4.6% for food, 8.7% for new vehicles, and a whopping 24.8% for energy. One of the best ways to stop inflation is for prices to rise to a point where people just refuse to pay the higher price. That seems to have happened with used cars and trucks, which fell 24.4% since this time last year. Many talking heads are using the word “stagflation” and they must not understand the term. It was first used in the 70’s – a time where the U.S. was in a recession, but inflation was raging despite a contraction in the economy. Our economy is not declining. It is quite the opposite with growth still likely continuing into next year. If the inflation rate doesn’t slow, then the Federal Reserve will likely start reducing its bond-buying sooner rather than later. This could cause long-term interest rates to rise.

HOW WOMEN BECOME BETTER INVESTORS

The past few ProVise Perspective$ have focused on Wells Fargo’s study examining the strengths of women investors. They highlighted two keys to becoming a better investor: identifying your financial temperament and reviewing a few investment concepts.

Though there is not a right or wrong type of investor, you might find it helpful to identify whether you fall into a distinct category like artisan, idealist, guardian, or rational. For instance, a rational investor takes the time to understand investments but might dwell too much on her previous poor investment decisions. While the guardian understands the importance of money, she may be too cautious and has the potential to invest in low-risk investments.

An artisan searches out ways to make money but might be overconfident and focus too much on short-term gains. The idealist focuses her energy on things other than money and finances like helping others and improving society. Her strength is leaving investments alone which is offset by her tendency to ignore money. Each category helps identify your approach to investments and lifestyle priorities.

With investment concepts, women should pay particular attention to understanding their asset allocation and not trying to time the market. Women, especially those identifying as conservative investors, should not make the mistake of putting too much of their portfolio in cash. Given the current interest rate environment that does not support savers, a better way to manage risk is through a balanced portfolio where we do not have all our eggs in one basket. Secondly, we support the premise that time in the market is more important than timing the market. Investors who try to time the market can suffer from lower returns over time.

INFLATION, SOCIAL SECURITY, AND MAXIMIZING BENEFITS

Retirees are in for a BIG bump in their Social Security checks starting in January with an annual increase of 5.9%. What many don’t know is that they may not be maximizing their Social Security benefit. Sure, you probably know that you can start as early as age 62 and as late as age 70. But which of those ages is right for you to maximize your benefit? Still, working, or not? What other sources of income do you have? How is your health? Are you a widow or widower? Divorced? How long were you married? Have you remarried? Married or single? All these questions and more affect your benefits. The good news is that you can correct any mistakes in most cases, or if you have not started yet and want to learn about maximizing your benefit, we can help.

PANDEMIC AND RETIREMENT

The pandemic has caused many to rethink the time to retire. For those that were good savers, the pandemic has caused many to reprioritize life and they are retiring earlier than they anticipated pre-pandemic. But for others, it was a setback. According to a recent Northwestern Life survey, 24% said they will retire later. Of that group, 35% are delaying it 3-5 years and a surprising 35% said it will take another 10 years. The average Baby Boomer expects to retire at age 68.3 with younger generations starting even earlier.  Gen X expects to start at age 64.3 and both Millennials and Gen Z are planning to leave the workforce before age 60. On average, the group felt they needed $1.05 million of savings to retire, and we question how many are well on their way to that goal. Our experience says that Baby Boomers thought they would retire earlier than they have and the same may be true for the younger generations. Health, the economy, jobs opportunities or not, caring for a family member, and life, in general, are likely to change many plans.

IMPORTANT DISCLOSURE