Is Inflation in the “peaking” process? The easy answer is yes, however the challenging question is when will the process be over?
Last week’s Consumer Price Index (CPI) report for April showed the first drop in eight months. The core CPI number reported was 8.3%, which is down from 8.6% in March. Many investors were hoping for a larger decrease. Hoping is one thing and reality is another.
A few months back, we wrote that inflation is beginning to peak, which now is obviously true. We expect consumer spending for the next couple of months to remain very strong because of previously mentioned factors…. warm weather, low unemployment, daylight savings time, lifted mask mandates, and a serious desire to go out and just have fun! Combining the lingering supply shortages with the current level of demand suggests inflation data will not quickly fall off of a cliff.
When Fed Chairman Jerome Powell raised rates a couple of weeks ago, he suggested the Fed could lower inflation without pushing the US economy into a recession. I guess he changed his mind yet again. Last Thursday, he stated he couldn’t promise an economic “soft-landing.” He also stated that perhaps the Fed should have acted sooner. Interesting to me that this is said after he was reappointed to a new term…. Enough said!
Last week, stocks finished another week in the red with the Dow down (2.08%), the S&P 500 down (2.35%), the Nasdaq (2.77%), and the Russell 2000 (2.50%).
Foreign stocks followed suit, dropping (1.37%) and Emerging Market stocks off (2.60%).
The Bloomberg Aggregate Bond Index rose .89% as the 10-year US Treasury yield dropped back from 3% to finish the week @ 2.93%.
TIPS AND GOLD
Treasury Inflation Protection Bond funds have been a topic of conversation because of the obvious. Many of the large mutual fund houses have a “TIPS” fund. Most of the core Treasury Inflation Protected Bond funds are down over 6% year-to-date. Yes, you receive an inflation component, however down 6% is down 6%.
Gold (which historically is thought of as an inflation hedge), started the year at $1831/oz. Gold moved higher and reached $1954/oz. on March 31st. As of last Friday May 13th, Gold finished the trading week @ $1814.50/oz. What will it take for Gold to move significantly higher? I hope we don’t find out!
If you are considering a Roth conversion, now may be a good time. Let’s say at the beginning of the year, you were thinking of converting $50,000 of your stock portfolio to a Roth IRA. Most likely, the 50K you were thinking of converting, is worth less than the 50K. Converting the lower amount now may save you taxes instead of converting the original 50K. If your stocks recover back to $50K you will be ahead of the game because you would have paid tax on an amount less than $50K.
Before doing the conversion, make sure the balance of this year’s income is known with close proximity. Also, make sure the conversion will not unexpectedly raise your Medicare Part B and Part D premiums, or have other accidental negatives on your income tax return.
We are in the process of gathering our clients 2021 tax returns and doing projections to examine if a Roth Conversion and/or other tax strategies make sense for 2022.
If you’re not a client, please feel free to reach out to have a discussion about your specific situation.