2021 has been a wild ride! But like with any roller coaster, we've learned that the most important thing to do is to stay in your seat so that you don't get hurt.
Video recap: https://youtu.be/4fuYYZNDALQ
On this episode, we recap our views on the top 10 economic stories from 2021 and the lessons they hold going forward.
Social Security remains a critical component of retirement income for most senior citizens. To ensure retirees maintain purchasing power through their golden years Social Security benefits are subject to an annual Cost of Living Adjustment (COLA) based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Due to rising prices and persistent inflation concerns, the COLA for 2022 will be 5.9%, the highest upward adjustment in decades.
If you are 62 or above and delaying benefits for your higher FRA or age 70 payment, you will also benefit from this adjustment. The Social Security COLA applies to estimated future payouts for anyone who is 62 or older in 2022, even if you have not yet filed for benefits.
While the higher COLA for 2022 is positive news for today’s Social Security recipients, retirees also need to consider how inflation may impact their other retirement income sources. Maintaining an investment portfolio with a healthy allocation to assets likely to outpace inflation over the long term remains critical to sustaining your standard of living.
Along with the rapid increase in energy and food prices, housing costs have contributed to an inflation rate that is at its highest level in more than 30 years. Low interest rates, low inventories and a strong increase in demand are driving home prices to record highs. The Raleigh housing market has been one of the hottest in the country. According to Zillow, the price of a home in Raleigh has gone up by 26% over the last twelve months! Large employers like Apple and Google have announced plans to expand their operations in the Triangle area which will add thousands of high paying jobs and bring even more demand to the local housing market. The last time housing prices were rising like this was in 2007 before the housing bubble popped. However, there are fundamental differences this time – lower interest rates, stricter loan underwriting standards and homebuyers with stronger balance sheets. Nonetheless, it’s likely that home price increases will stabilize, especially if we get a spike in interest rates. This will be a story to watch closely in 2022.
Almost every year there seems to be substantial concern over the amount of US government debt and 2021 was another one. It is notable that concerns tend to become louder when there is pending legislation or upcoming elections, but the concerns tend to involve some fundamental misunderstandings.
One of the most common arguments is that the US government should operate like a household and not have so much debt. Two of the problems with that argument are:
Another misunderstanding is that high government debt leads to hyperinflation. We can see that the argument is weak since Japan has had much higher government debt than the US for the last 20+ years with extremely low inflation.
But there are cases where high government debt and hyperinflation occurred and looking at the difference in those cases compared to Japan demonstrates the misunderstanding.
In Japan’s case, their debts are denominated in their own currency, the Yen. In the hyperinflation cases, the debt is owed in some other country’s currency. When a nation owes debts in another currency, if their own currency declines, the debt becomes bigger when translated back to their own currency.
This can lead to a spiral where the debt becomes harder to pay, which causes more loss of confidence in the borrower’s currency, which leads to falling currency and this spiral can continue until the borrower’s currency becomes effectively worthless and the foreign currency debt cannot be repaid.
Fortunately, the US government is a very reliable borrower, so all US government debt is denominated in US dollars.
Starting all the way back on the run on toilet paper to the shortages at your local Chick-Fil-A , supply chain scares have existed since the beginning of the pandemic. COVID outbreaks at various distribution centers and manufacturing plants sent ripple effects throughout the supply chain system which are continuously being felt to this day. Auto dealers lots have been empty of new cars for over a year now with the chip shortage, loaded cargo ships sit backed up off the coast of California, and basic items at your local grocery randomly seem out of stock (no individual packaged gold fish snacks is really bugging my two toddlers 😊). Of course with high demand and low inventory, prices have risen as you’ve seen if shopping for a car, or even just the increase in value of your current used car sitting in the driveway. The supply chain system that once seemed so smooth is now unpredictable and impacting every aspect of the lives of consumers.
Ahead of his inauguration, President Joe Biden proposed legislation that addressed funding for COVID-19 relief, social services, welfare, infrastructure, and the reduction of climate change effects – coined the Build Back Better Plan. The underlying components of this plan were much debated in Congress throughout 2021, with some parts of the plan passing through legislation after extensive negotiations from both sides of the political aisle. In March, Congress passed the American Rescue Plan, a COVID-19 relief package. In November, The Infrastructure Investment and Jobs Act was passed and included funding for broadband access, clean water, electric grid renewal and additional infrastructure maintenance and improvements. The Build Back Better Act, seen as the final component to the Build Back Better Plan, was passed by the House in November and now heads to the Senate to debate. In its current form, the Act includes additional funding for climate change provisions, increased funding for childcare, home care, housing and child tax credits, paid family leave, and extended Affordable Care Act subsidies. Much of this proposal would be paid for via a minimum corporate tax of 15% and increased taxes on the wealthiest taxpayers. As has been the case throughout the year, this Act will likely be much debated and revised in the Senate, and if passed, would then head back to the House for a second vote.
Inflation was the subject of many conversations in 2021 as well as one source of financial stress for many households. During the summer, monthly inflation started creeping higher, and many economists believed that the higher inflation would be short-lived. By October, 12-month inflation of 6.2% was at the highest rate since 1990 and higher than the Federal Reserve’s target of 2%. Some top contributors to this higher-than-desired inflation include supply chain issues, post-lockdown demand for goods and services, and increased prices on fuel and used cars. The effects of inflation will vary from household to household, with some feeling it more acutely than others. Inflation is a fact of life; no one can avoid it completely. Thankfully, stock growth has outpaced inflation over time. This is why it’s important to have your long-term savings invested in a well-diversified investing strategy to help your money grow faster than inflation.
GameStop is a company that sells video games, consoles, and assorted merchandise. It made headlines earlier this year when the stock price went from ~$20 to ~$483 in less than a month (January 2021). As of December 2, 2021, the stock down ~63% from earlier highs. What happened? Short story is a group of retail traders worked together (Redditt forum) to force professional money managers to buy the stock to cover their short position. This resulted in significant demand which drove the price up to levels no one expected. The summary is markets can be crazy and feel unfair in the short-run. The best way to reach your financial goals is not to avoid the markets, but to act and think long-term. Investment success is driven by patience and discipline, not gambling.
Yes, all-time stock market highs aren’t all that uncommon. In fact, we’re in the 9th year where the S&P 500 has set at least 10 new all-time highs during each of those years. In 2021, we’ve now seen 68 new highs as of November 20th. But, for many investors, all-time high prices can be a cause for concern. They worry if they’ve missed the run up. Or shy away because what goes up, must come down. While that tends to happen every six to seven years in the markets, what’s most important to remember is that all declines up to this point have been temporary. This is where evidence can help. Looking at the S&P 500 94 year history, even if you invested at all-time highs, you’d have enjoyed double-digit annualized returns one, three, and 5 years later. Another great example of how a durable, disciplined, and diversified portfolio can help you fight the temptation to try and time the markets based on headlines. We addressed this idea in a recent podcast and video here.
As we entered round two of the pandemic, headlines of yet another COVID-19 mutation known as the Delta variant took over our news and media feeds and quickly became a major economic topic of discussion for the year.
First detected in March of 2021 the highly infectious Delta variant became the predominant strain, eventually accounting for over 90% of confirmed cases across the globe this year. The variant's impact stretched across multiple economies causing businesses to scale back staffing capacity, delay workers returning to the office, and experience widespread supply chain disruptions worldwide.
Navigating an unprecedented pandemic remains a factor of concern for economic interruption as we adjust to new headlines daily. We look onward into 2022 for signs of improvement as our world economies adapt to strengthen economic resilience.
Bitcoin and Ethereum, the two largest cryptocurrencies, recently set new all-time highs in 2021. Although they’ve since experienced substantial drops in price, there is no argument that cryptocurrencies have continued to increase in popularity among investors, pop culture, institutions, as well as criminals. The first Bitcoin linked ETF made its debut on the NYSE in October and BlackRock, a global asset manager, added Bitcoin futures to two of its funds in January. Mainstream companies such as AMC will begin to accept Bitcoin payments and others like PayPal and Square are allowing users to buy it on their platforms while a number of companies have added it to their balance sheets. Lawmakers around the world and in the US continue to try to tackle laws and guidelines to make cryptocurrency safer for investors and less appealing to cyber criminals which could have varying effects on crypto in the future. One could speculate on the value of cryptocurrency could possibly hold for its investors in the short or long term but as a relatively new and speculative investment, its extreme volatility could take investors on a wild and bumpy ride.
Everyone is talking about inflation. You can’t open a newspaper, look at your phone, or go to a barbecue without hearing about it. With all this talk, it can be easy to worry about your financial future.
Video recap: https://youtu.be/iZoqhqEVR1I
On this episode of Financial Symmetry, we’ll explore the causes of inflation, historical inflation, and what you can do to hedge against this silent enemy. Press play to educate yourself and ease your worries.
Inflation is different from market risk: it doesn’t show up in your bank or investment accounts. Instead, inflation presents itself at the gas station and the grocery store, so you do feel it in your pocketbook. Since it eats away at your buying power, inflation is often referred to as retirement’s silent danger.
If you recall your college economy class, you’ll remember that inflation is caused by supply and demand. When there is a limited supply and a high demand, then prices go up. We see that happening now with auto sales due to the offline chip manufacturers and supply chain issues. During inflation, people worry that prices will continue to rise, so they want to rush out and make their purchases now.
Although it is frustrating to see your purchasing power erode so quickly, it is important to remember that there are worse things that can happen in the economy. Deflation is actually worse for the economy than inflation. Stagflation is a type of inflation that occurs when prices go up but the economy is slow and there is high unemployment. Thankfully, we have the opposite happening now since employers are having a hard time finding workers. Even though it is difficult to watch your purchasing power erode, there could be a worse economy.
The question on everyone’s mind is: will this inflation last? Over the past 10 years, we have had historically low inflation that averaged about 2%. When comparing that average to this past year’s average of 6%, it's easy to understand why people are concerned.
One way to contemplate the future is by looking at the past. In the 70s the US experienced some of the highest prolonged inflation rates that were punctuated by the shock in oil supply. After WWI Germany experienced crippling inflation when it had to repay its debts in foreign currency.
The good news about our current situation is that the supply chain issues will eventually be resolved. The bad news is that higher prices are often the best solution to higher prices. Listen in to see how that works out in the long run.
The reason we invest in companies is to hedge against inflation. A varied investment portfolio with global stocks is one way to ensure that you retain buying power down the road. In addition to creating a diversified portfolio, you should limit the amount of money that you retain in cash. Try to keep your cash to emergency savings since your purchasing power erodes over time. Another way that you can protect against this silent risk is by investing in TIPS, real estate, commodities, or crypto currency.
Whatever you do to protect your wealth, don’t let the media dictate your financial decisions. Stick to your financial plan. If you don’t have a financial plan, reach out to us to see how we can help you weather all kinds of financial storms.