What a quarter it has been.

In my last several quarterly letters, I insist that risk-based investments are called that way because there is an element of RISK in the investments. For 18 months, I was wrong, and the market continued to shake off all directional changes as temporary, until now. Inflation has crept into the room like a drill sergeant gently waking his platoon for morning PT.

Want a scary number? The inflation rate is 416% higher than it was a year ago. 416% in a year!

Transitory?

The Fed and governmental agencies have called this rise in inflation “transitory.” This was confusing to me as the way they used this term to denote rising inflation was not permanent, which is exactly what transitory means. But why would they say that? Of course, it isn’t permanent; nothing is, and why would they continue to use the term “transitory” and not just say “not permanent?” I assume this term is directed to portfolio managers, so they do not worry about the market and stay invested, to avoid large sell-offs that may change the Fed’s tightening plans.

Although, that may just be the conspiratorialist in me.

Effects of Inflation

In either case, prices are going up. You would notice if you have bought a house, a car, paid an energy bill, bought milk or In the case for Californians, filled up our car with gashe long-term effect of inflation is not only scary, but if unplanned for, many people entering or in retirement can significantly erode the value of your dollar and lead to increasing your withdrawal percentage. This may, in turn, shorten the time you may have planned to take larger chunks of income in your early retirement years.

Examples –

$1 over 30-year retirement @ 2.47% 10-year average inflation = $2.08 buying power

$1 over 30-year retirement @ 3.25% long term average       = $2.61 buying power

This means your money doesn’t go as far with higher inflation, and for the last ten years, we have seen very low inflation. If you are not building in higher inflation targets and assumptions, you may be in for a headache later in retirement.

Markets

4th quarter 2021 saw gains across the board in equity markets, capping off a year that saw outperformance of large caps over small (28.7% vs. 14.8%), and the Energy sector outperformed others (54.4%).

Many analysts (including Fidelity) believe they are in “Late Mid Business Cycle before a downturn, marked by:

  • Growth Peaking
  • Credit Growth
  • Profit Growth
  • And slow-growing inventories

Mid-market cycles also carry the timing of most market corrections averaging a 13% downturn from the peak and lasting four months or less.

What I am watching:

  1. Divisional series in NFL, can the Buccaneers repeat?
  2. Fed meeting on March 16th. What happens when the Fed must come to grips with a declining market and a tightening economic agenda?
  3. ETF Flows are usually a good indication of what NOT to invest in as flows generally follow the past performance.

The beginning of the year is a great time to review your financial plan (do not read the investment plan), including goals, timeframes, risks, and assumptions.

Happy New Year if I haven’t seen or spoken with you! Call or email my office with any questions or concerns.

Philip Clark, CPWA®, CFP®, CLU®| Director – Wealth Management
Direct: 626.788.3947 | [email protected]

 

https://ycharts.com/indicators/us_inflation_rate
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm


This information should not be construed as tax advice, nor should be taken as financial planning advice. Please consult your tax professional. These opinions are based on observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 01/20/2021 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results.

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