I Bonds | Retirement Cash | Market Impact on Your Financial Plan

Objective Financial Advice

Greetings!

We hope you are staying cool out there this summer!

You have no doubt been following the latest inflation numbers and the investment market volatility. We have an in-depth review of the second quarter investment outcomes below, along with commentary on how it may affect your financial planning. We also offer suggestions on what you should do in response. We hope it’s helpful to you.

With rising interest rates, we are seeing an uptick on interest earned on savings account as well as CDs again. If you're earning a measly .1% on your savings account right now, this is your call to action to shop around!

Just last month, our firm was recognized as a Great Place to Work! This is a national certification that is granted to a company based on an anonymous survey each employee completes. We're thrilled that our team members can attest to KFP being a great place to work.

You may see a new (or familiar) face the next time you're in the office. We're excited to welcome Zach Tingle and to welcome back Beth Shurtz to our financial planning team! Thomas Warkins has also recently joined our operations team! They all share a little about themselves here.

Please read on for other actionable planning ideas and last quarter's investment market review. Our office will be closed for Labor Day (Monday, September 5th). We plan to send the next newsletter out in mid October. We'd love to hear from you on questions or suggestions for topics you’d like to see covered in the future.

Series I Bonds for Individuals

There is a lot of hype around I bonds in our current market conditions. With a 9.62% interest rate, it's easy to see why.

Have we found the unicorn in today's investment market? See if this "mythical creature" may be a good fit for you here.

Accessing Cash in Retirement

Sitting out of the investment market can hurt your financial plan because of missed opportunities. However, staying in the market for too long when you need cash can lead to selling at a bad time. Our lead planner, Samuel Pond, shares how we find the balance for our clients in need of distributions here.

Investment Market Update and How It Affects Your Financial Plan

The stock market officially went into a bear market in second quarter. The S&P 500 was down over 20% from its high in early January. While we can be assured that recoveries have historically followed every bear market, we don’t know how deep this downturn will go, when the recovery will start, or how long it will take.

The S&P 500 lost -16.1% last quarter, taking the 12-month return to -10.62%. Small cap stocks struggled more at -17.49% for the quarter. Once again, large cap value stocks lost less at -12.21% for the quarter. Value stocks continue to lose less than growth stocks in this downturn.

Developed market stocks lost -14.51% for the quarter, losing less than the S&P 500. Emerging markets stock lost less than developed markets stock this past quarter at -11.45%.

The US aggregate bond index lost -4.69% for the quarter. As interest rates rise, bond funds go down in value. Shorter-term bond funds will see less of a reduction in value because they will start incorporating holdings at the higher interest rate faster. A longer-term bond fund will be more sensitive to interest rate changes and will see more of a decline in value as interest rates increase. Ultimately, higher interest rates are good for long-term investors as they will reap the benefits as this will lead to a bond paying more than it is today.

We want to specifically address Treasury Inflation Protected bond funds. They were down -6.08% for the quarter. One would think that in a rising inflation environment, TIPs funds should be marking money. While their yield has increased as a result of inflation, they are longer duration bonds. As a result of their duration, the price of the bonds dropped more in second quarter than the inflation-linked income paid out. These bonds still hold a place in a long-term investor’s portfolio.

Many of our clients are seeing a lower plan probability of success due to the year's market performance and the persistence of rising inflation. It’s normal to have a plan’s probability of success drop during market conditions like this. It’s also helpful to realize that the opposite of success in this case isn’t failure. If we look at a plan with an 80% probability of success, that means there’s a 20% chance of needing to make an adjustment at some point. That adjustment may be small or more significant, depending on how proactive you are with reviewing your plan and making any necessary course corrections.

We test our plans for bad timing and with 1,000 different trials for rates of return and sequences of return because we know there are going to be some turbulent market years that contribute to that average rate of return we assign to a given portfolio.

So, what should you do in response to the market volatility and increased inflation?

As you know, we don’t recommend making changes to your investment portfolio based on current market conditions. The long-term fundamentals of investing still hold true. Bonds will stop losing value when new information indicating potentially higher future interest rates stops coming out. The stock market will never lose 100% of its value unless all the companies in it go out of business. We recommend maintaining your target asset allocation through rebalancing. If you’re making contributions to an investment account, keep making them. Both of these actions will enable a faster recovery when it begins.

It's now also more important than it has been in recent years to review your plan, especially before proceeding with making a large expense or before making that decision to retire. If you’re already retired, it’s a good idea to test your plan prior to adjusting your spending for inflation. We are here to help you make those decisions with confidence.

*Source for investment returns is Morningstar as of June 30, 2022. S&P 500 TR USD for S&P 500. Russell 2000 TR USD for small cap stock. Russell 1000 Value TR USD for large value stocks. MSCI EAFE NR USD for developed international markets. MSCI EM NR USD for emerging markets stock. Bloomberg US Agg Bond TR USD for the US aggregate bond index. Bloomberg US Treasury US TIPS TR USD for inflation-protected bonds.

Bear Market? Yes, but a Recession? Maybe

Are we in a recession today? That’s one of the key questions that investors and economists are asking, and there is no easy answer.

A recession is a period of time when the economy stops its usual long-term growth pattern and starts shrinking. The technical definition is a drop in the value of goods and services produced (the gross domestic product) for two consecutive quarters. This is often associated with declining incomes, employment, industrial production and retail sales.

The U.S. experienced a shrinking GDP in the first three months of the year, down at an annual pace of 1.6%. But employment was strong, incomes were rising and prices of goods and services were going up rather than down. And that dismal first quarter follows a robust 6.9% increase in the previous quarter.

The conclusion is that if we are, indeed, experiencing a recession, it is an unusual one, triggered not by the usual decline in corporate activity and job losses, but by a unique combination of supply chain disruptions, a war in Europe, rising energy prices, and the persistence of COVID. In what other recession in history could we say (as we can today) that the economy added 390,000 new jobs in May, the 17th straight monthly gain, and the unemployment rate is at 3.6%—the lowest in a half century?

Unusual recessions are actually not that unusual. As recently as 2020, the U.S. economy experienced a sharp two-month downturn, the shortest ever. The Great Recession, on the other hand, lasted for 18 months, and was triggered not by the usual economic factors, but by reckless Wall Street sales of sketchy bundles of mortgages with little underwriting—followed by a housing collapse.

Often, recessions are brought to heel by a Central Bank stimulus. In the case of the Great Recession and the more recent COVID downturn in 2020, the U.S. Fed flooded the economy with money at zero or near-zero interest rates, and made itself a significant buyer of government and mortgage bonds. Both times, the medicine worked. We cannot expect the Fed to ride to the rescue while the inflation rate is as high as it has been, but eventually an economic downturn will depress prices, and stimulus will once again be possible.

Article adapted with permission of financial columnist, Bob Veres.

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