Inverted Yield Curve + Inflation = Stay the Course

Last week, the yield curve inverted for the first time since August 2019 (as
a refresher, a yield curve inversion means that long-term interest rates have dropped below short-term rates).

Why do we pay attention to this?

Because this inversion suggests that investors believe the near-term economy to be riskier than the long-term.

This recent inversion in the yield curve and inflation soaring above 7% have left some investors wondering whether to adjust their investment strategy. While it can be tempting to worry and want to rush and make changes, the current environment is cause for monitoring, not cause for panic.

Yes, rising interest rates, high inflation, surging oil prices, and geopolitical tensions have helped contribute to economic uncertainty. And because financial markets don’t like uncertainty, they have been performing accordingly.

U.S. inflation clocked in at 7.9% for the 12 months ended February 2022 — the highest rate since December 1981. Energy prices, already on the rise, jumped when Russia invaded Ukraine. In response, the Federal Reserve started raising interest rates, hoping to slow the economy without triggering a recession.

Higher interest rates can be negative for the stock market, as the cost of doing business rises for some companies, potentially impacting their growth rates. However, Bloomberg data shows that in each of the last eight hiking cycles, stock prices were higher a year after the first increase. Of course, past performance is never a guarantee of future results.

Fixed-income securities can be particularly sensitive to interest rate increases due to the inverse relationship between bond yields and prices. Despite increased short-term volatility, it’s important to remember the role fixed-income plays in your portfolio – diversification, preservation of capital, and income.

So in a nutshell = Stay the Course

As your financial advisor, I’m here to help you navigate these choppy waters and keep you on track to pursue your goals. Rest assured, I will continue to monitor your investments and make adjustments if necessary.

If you have questions, you know I’m just a phone call or email away.

Talk to you soon.

What’s This Talk About a Recession?

In recent weeks, the word recession has started creeping into business news and financial market coverage.

Is that cause for alarm or just another attention-grabbing headline? There’s no simple answer.

A recession is defined as two consecutive quarters of negative economic growth as measured by gross domestic product (GDP). But GDP is a lag indicator, so we may not know until sometime in 2023 if we lived through a recession in 2022.

One lead indicator that has signaled a recession may be on the horizon. It’s called the yield curve.

In an expanding economy, the yield curve slopes upward to the right. But in a slowdown, the curve can invert, and the yield on short-term Treasuries is higher than longer-term ones. An inverted yield curve suggests that investors have lost some confidence in the economy and have started shifting money around.

Some swear by the yield curve, pointing out that it’s inverted preceding every recession in recent memory. Others are not so certain. They explain that while today’s “nominal curve” did invert, the “real curve,” adjusted for inflation, tells a different story.

It’s not easy sorting through the economic noise these days. That’s why our team examines various indicators, including the yield curve. If we see the need for a portfolio change, we’ll explain why we are charting a new course.

April is Financial Literacy Month

April marks the start of Financial Literacy Month, a nationally recognized movement to promote and support financial understanding in children and teens. For many, it’s a fantastic opportunity to teach and connect with their children or grandchildren, and these kids are ready to learn! Recent data shows that nearly 74% of teens desire to be financially literate, and 86% want to learn how to invest.¹

Teens tune in
Every parent has questioned if their child is actually paying attention. But rest assured, our children and grandchildren are listening: 75% of teens in America identify their family as their most trusted source of financial education. In other words, our youngest savers and investors are looking to us for their financial education.²

How to start
It all begins with a frank conversation regarding finances. By demonstrating your openness to discussing what many consider a “taboo” topic, you’re also modeling how to approach finances for your young learner. In time, they’ll learn to view financial issues and goals clearly with as little unnecessary stress as possible.

A bright future
Financial literacy month has been shown to have a lasting, positive impact on our future investors. Children who are taught personal finance from a young age are more likely to secure lower-cost loans and grants when paying for college and less likely to rely on private loans or high-interest credit cards.³

If you decide to put your “teacher” hat on this month, let us know! We’re always happy to help educate and support our future generations.

9 Facts About Retirement

Retirement can have many meanings. For some, it will be a time to travel and spend time with family members. For others, it will be a time to start a new business or begin a charitable endeavor. Regardless of what approach you intend to take, here are nine things about retirement that might surprise you.

1. Many consider the standard retirement age to be 65. One of the key influencers in arriving at that age was Germany, which initially set its retirement age at 70 then lowered it to age 65.¹
2. Every day between now and the end of the next decade, another 10,000 baby boomers are expected to turn 65. That’s roughly one person every 8 seconds.²
3. The 65-and-older population is the fastest growing age group in the United States, and has grown by 34.2% over the past decade.³
4. Ernest Ackerman was the first person to receive a Social Security benefit. In March 1937, the Cleveland streetcar motorman received a one-time, lump-sum payment of 17¢. Ackerman worked one day under Social Security. He earned $5 for the day and paid a nickel in payroll taxes. His lump-sum payout was equal to 3.5% of his wages.⁴
5. Eighty percent of retirees say they are confident about having enough money to live comfortably throughout their retirement years.⁵
6. The monthly median cost of an assisted living facility is over $4,000, and 7 out of 10 people will require extended care in their lifetime.²
7. Sixty-two percent of retirees are dependent upon Social Security as a major source of their income. The average monthly Social Security benefit at the beginning of 2021 was $1,543.^5,6
8. Centenarians – in 2020 there were 92,000 of them. By 2060, this number is expected to increase to 589,000.⁷
9. Seniors age 65 and over spend over 4 hours a day, on average, watching TV.⁸

Conclusion

These stats and trends point to one conclusion: The 65-and-older age group is expected to become larger and more influential in the future. Have you made arrangements for health care? Are you comfortable with your investment decisions? If you are unsure about your decisions, maybe it’s time to develop a solid strategy for the future.

Inflation Overreach

What do The Dukes of Hazzard, M*A*S*H, and The Love Boat all have in common? They were top-rated television programs in 1982; the last time inflation was hovering in the 7% range.

When inflation is running hot, you can feel its overreach in almost every corner of the economy. People see it when they buy gas or buy food at the grocery store, but its influence touches mortgage rates, credit card debt, and overall consumer confidence.

Managing inflation is the job of the Federal Reserve, and the Fed’s approach with monetary policy reflects its near single-minded focus on higher prices in 2022. The Fed raised short-term interest rates at its March meeting, and Fed Chair Powell signaled more is needed before the Fed can wrestle control of inflation.

It may be only a matter of time before the Fed’s policies temper inflation. Some see a change in the second half of the year, while others say 2023 is more likely. But in the months ahead, it’s possible inflation reports will bring back memories of Laverne & Shirley and Magnum, P.I.

If you’re feeling an inflation pinch, please reach out. We’d welcome the chance to hear your story. In the meantime, our team of professionals will monitor the situation and keep you updated if we believe any portfolio changes are needed.

What Do Your Taxes Pay For?

Taxes are one of the biggest budget items for most taxpayers, yet many have no idea what they’re getting for their money.

In 2017, as in recent years, Americans spent more on taxes than on groceries, clothing, and shelter combined. In fact, we worked until late April just to earn enough money to pay our taxes. So what do all those weeks of work get us?¹

The accompanying chart breaks down the $4 trillion in federal spending for 2017 into major categories. One of the biggest categories is Social Security, which consumes one-fourth of the budget. Income security, which includes food assistance and unemployment compensation, takes another 13%. Defense and related items take 15% of the budget, and 26% goes to Medicare and health programs.²

Are taxes one of your biggest budget items? Take steps to make sure you’re managing your overall tax bill. Please consult a tax professional for specific information regarding your individual situation.

Pieces of the Federal Pie

More than 60% of 2017 federal spending was used for Social Security, Medicare, defense, and related programs.

Source: Center on Budget and Policy Priorities, January 29, 2019

Medicare General Enrollment Ends On March 31st

The general enrollment period for Medicare goes from January 1st to March 31st. If you haven’t decided yet, your time is running out for the year.

It may not be immediately clear what this specific enrollment period is for, as several enrollment periods are related to Medicare. In this case, the enrollment window is for those who haven’t signed up for Medicare Part B but don’t have access to Part B’s special enrollment period.

You can also use this period to enroll in Medicare Part A if you have to pay a premium but did not sign up for Part A when you were first eligible.

Enrolling can be done online at Medicare.gov. From there, you can get started or make contact with someone who can answer questions and help further.

Medicare plays a critical role in your healthcare coverage in retirement. If you have questions after you have signed up, please reach out. We have a variety of resources that may provide you with insight.

What If You Get Audited?

“Audit” is a word that can strike fear into the hearts of taxpayers.

However, the chances of an Internal Revenue Service audit aren’t that high. Between 2010 and 2018, the IRS only audited 0.6% of all individual tax returns.¹

And being audited does not necessarily imply that the IRS suspects wrongdoing. The IRS says an audit is just a formal review of a tax return to ensure information is being reported according to current tax law and to verify that the information itself is accurate.

The IRS selects returns for audit using three main methods.²

• Random Selection. Some returns are chosen at random based on the results of a statistical formula.
• Information Matching. The IRS compares reports from payers — W2 forms from employers, 1099 forms from banks and brokerages, and others — to the returns filed by taxpayers. Those that don’t match may be examined further.
• Related Examinations. Some returns are selected for an audit because they involve issues or transactions with other taxpayers whose returns have been selected for examination.

There are a number of sound tax practices that may reduce the chances of an audit.

• Provide Complete Information. Among the most commonly overlooked information is missing Social Security numbers — including those for any dependent children and ex-spouses.
• Avoid Math Errors. When the IRS receives a return that contains math errors, it assesses the error and sends a notice without following its normal deficiency procedures.
• Match Your Statements. The numbers on any W-2 and 1099 forms must match the returns to which they are tied. Those that don’t match may be flagged for an audit.
• Don’t Repeat Mistakes. The IRS remembers those returns it has audited. It may check to make sure past errors aren’t repeated.
• Keep Complete Records. This won’t reduce the chance of an audit, but it potentially may make it much easier to comply with IRS requests for documentation.

Remember, the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Split Decision: Who Joins the Dow 30

You may have heard that both Amazon and Alphabet recently announced stock splits. But what you may have missed is the subplot to the unfolding story.

The decision to split makes it likely that one of them will be added to the Dow Jones Industrial Average (DJIA) the next time there’s a change.

The DJIA is a price-weighted index, meaning its value is derived from the price per share for each stock divided by 30. Some believe that Google and Amazon were too high priced to get selected. By splitting, they improve their chances.

Amazon says it plans to split 20-for-1 in early June. Were the stock to close at $2,500 on the day of the split, each share would go to $125 and each existing holder would get 19 additional shares for every one they own.

Alphabet says it plans to split 20-for-1 in mid-July. Shareholders will get the same treatment.

A company’s board of directors makes stock-split decisions. Among other reasons, the board is looking to make the shares more affordable to employees and individual investors.

Stock splits can be confusing, so please reach out if you want more detailed information. And remember, Amazon and Alphabet are highlighted because they are splitting their shares. This is not a solicitation to buy or sell the securities.

Social Security: Maximizing Benefits

Most understand that waiting to claim Social Security benefits can result in higher monthly payments. However, many don’t know that there are other ways to maximize their benefits, some of which depend on their marital status.

Understanding the strategies for maximizing your Social Security retirement income benefits should be prefaced with a review of the three basic forms of retirement benefits:

1. The Worker Benefit: This is the benefit you receive based on your own personal earnings history, and for which you become eligible after 40 quarters of work.
2. The Spousal Benefit: This is the benefit paid to your spouse. For non-working spouses, this is 50% of the working spouse’s benefit. For working spouses, it is the greater of the benefit earned from his or her earnings or 50% of the worker’s benefit.
3. The Survivor Benefit: This is the benefit paid to the surviving spouse, which is paid at a rate equal to the greater of his or her own current benefit, or, depending on the widow or widower’s age, up to 100 % of the deceased spouse’s current benefit.¹

The first and most obvious strategy for maximizing your Social Security benefit is to simply wait to reach age 70 before beginning to take benefits. By waiting until age 70 to receive benefits, your monthly payments may increase by 24%, not including any cost of living increases that may be added to this amount.²

Benefit Maximization Strategies for Widows and Widowers

Remember, there is no spousal benefit for a widow/widower, but he or she does qualify for a survivor benefit that is equal to 100% of the deceased spouse’s benefit (versus the 50% spousal benefit if the working spouse is still alive). This survivor benefit is available at age 60 or even earlier, depending on the widow/widower’s disability status and whether or not they are caring for a child.³

If you are widowed and also have worked for 40 quarters, you will have a worker benefit and a survivor benefit. This presents you with several choices. One choice is to file for the benefit that provides you the greatest monthly benefit amount.

Another choice may be to start your worker benefit at age 62 and then switch to the survivor benefit once you reach full retirement age. This option is advantageous in instances where the widowed spouse did not accumulate the same level of benefits as the deceased spouse. Choosing this option allows the surviving spouse to take the higher survivor benefit amount. Because there are no delayed retirement credits earned on survivor benefits, there is no advantage to waiting past full retirement age to apply for survivor benefits.⁴

A final choice is to consider starting the survivor benefit at age 60 and then switching to your own worker benefit at age 70. This strategy allows you to begin receiving income based on the survivor benefit as early as possible and provides you time to build up the maximum worker benefit.

As you can see, there are ways you can potentially raise your Social Security benefits. These strategies can help you maximize your benefits beyond what is available to those who simply delay retirement to age 70.