Bob’s Journal for 2/24/22

Where to Find Income and Safety Today

Bonds don’t belong in most portfolios right now. We discussed that in detail in our latest teleforum exclusively for Retirement Watch and Spotlight Series members. Click the link for a replay.

Bonds aren’t providing income today. Despite the recent increases, interest rates still are historically low.

What’s worse, rates look likely to increase for a while until inflation is under control. So, prices of bonds are declining while the income still is low.

Stocks are declining at the same time as bonds. That means bonds aren’t providing their historic diversification benefit. They’re supposed to rise or hold steady when stocks decline and also provide interest income to offset some of the declines in stocks.

A good alternative now for someone who’s saving for retirement or has money set aside for safety that isn’t likely to be needed for a while is an annuity known as a MYGA (multi-year guaranteed annuity). It’s like a certificate of deposit (CD) inside an annuity. In addition to the safety and tax deferral of an annuity, you’ll earn a higher rate than is available from bank CDs.

Rates vary from state to state, but you can lock in a guaranteed three-year rate of 2.5% and a five-year rate above 3%.

For those already retired, consider shifting some money from bonds and other fixed income instruments into an income annuity, also known as a single premium immediate annuity (SPIA).

The SPIA will pay you income for life, no matter how long you live. It’s guaranteed by the insurer. You don’t worry about fluctuations in interest rates, stocks, or other markets.

As I explained in my November 2021 edition of the Retirement Watch Spotlight Series, income annuities also allow a retiree to increase spending safely.

In our teleforum, we explained that you can learn the best rates and income available to you from annuities by going to Stan the Annuity Man’s website and using the calculators. You don’t have to give a credit card and won’t receive any unsolicited phone calls.

Stocks Rise Above Pre-Pandemic Highs

Despite the decline from last November’s record levels, many stocks were above their pre-pandemic peaks two years to the day after the pre-pandemic market high.

A look at the charts shows that major stock indexes hit a record high on February 19, 2020. Then, the pandemic crash began, taking the major indexes about 30% below their peaks by March 23, 2020.

But now, the Russell 3000 index is about 36% above its pre-pandemic high (as of last Friday’s closing).

Of course, not all stocks and stock sectors performed the same.

The leading sector during this period wasn’t technology or consumer discretionary, though those sectors did best during the pandemic. They came in second and third, with returns of 61.28% and 55.55%, respectively, according to Bespoke Investment Group.

The leading sector, thanks to its surge since mid-2021, was energy. It is up 84.55% from its pre-pandemic peak.

Utilities were the only sector to still be underwater with a loss of 8.99%. Real estate had the lowest gain, 5.10%.

About a third of the individual stocks in the Russell 3000 still were below their pre-pandemic peaks, according to Bespoke. In the utility sector, 76% of stocks were below their peaks. The percentage of stocks below their peaks also exceeded 50% in the health care and real estate sectors.

The materials sector had the fourth-highest highest return among sectors since the pre-pandemic peak at 51.19%. But the sector had the lowest percentage of stocks still selling below their pre-pandemic highs, at only 16.8%.

The stocks were selling at high valuations before the pandemic. Many soared above their pre-pandemic prices after the lows of the pandemic. That gave them even higher valuations and greatly reduced the margin of safety in the market indexes.

Social Security and Inflation

Should people rush to claim Social Security benefits to cash in on inflation indexing?

You know that Social Security benefits are indexed for inflation. But there’s a lot of confusion about how inflation affects benefits that haven’t been claimed yet. I’ve received several questions from readers who had planned to delay receiving Social Security to maximize benefits but now are worried their benefits will lose out on the inflation indexing.

They don’t need to worry.

People can claim Social Security retirement benefits as early as age 62. But each month that claiming benefits is delayed increases the benefits, until the maximum benefit is reached by claiming at age 70. The increases are known as delayed retirement credits.

Before age 62, your earnings history is indexed for overall wage inflation. That indexing stops at age 62. But the cost-of-living adjustments begin at age 62, whether you are claiming benefits or waiting.

So, by waiting to claim benefits you receive the delayed retirement credits. Plus, you receive any inflation indexing of benefits that occurred after age 62.

While today’s higher inflation should influence a lot of decisions, it shouldn’t change your decision about when to claim Social Security retirement benefits.

The Data

U.S. home prices rose at a record rate in 2021, according to the S&P Corelogic Case-Shiller Home Price Index.

The index rose 1.1% in December, giving it an 18.6% increase for 2021. The 12-month increase was unchanged from November. The 18.6% increase is the highest calendar-year increase in the history of the index, which goes back to 1987.

Of the 20 cities in the index, Phoenix has had the highest rate of price increases for 31 consecutive months.

The Federal Housing Finance Agency House (FHFA) Price Index reported similar results. Its reading increased 1.2% in December and 17.6% over 12 months.

Housing starts in January were 4.1% lower than in December but 0.8% higher than 12 months ago. Single-family home starts declined 5.6% from December to January and 2.4% over 12 months. Multi-family home starts, however, increased 8.3% over 12 months.

Existing home sales in January increased 6.7% from December’s level. Sales increased though the supply of homes for sale declined to a record low. Despite the sales surge from December, January’s sales were 2.3% lower than 12 months earlier.

The supply of homes for sale in January was 16.5% lower than 12 months earlier.

The median price of homes sold in January increased to $350,300. That’s 15.4% higher than 12 months earlier. Part of the reason for the higher median price is that there are fewer lower-priced homes for sale. Most of the buying is of higher-priced homes.

Sales of homes priced between $100,000 and $250,000 were 23% lower than 12 months earlier. Sales were up 33% for homes priced between $750,000 and $1 million, and 39% for those priced above $1 million.

New unemployment claims increased by 23,000 to 248,000 in the latest week. But continuing claims declined by 36,295 to just over two million.

The Philadelphia Fed Manufacturing Index declined to 16.0 in February from 23.2 in January. The February level indicates strong growth but at a slower rate than in January.

The Richmond Fed Manufacturing Index dived in February to 1, following a reading of 8 in January. The February level indicates manufacturing in the region is just barely growing.

Economic growth increased in the first half of February, according to the PMI Composite Flash Index.

The Manufacturing Index increased to 57.5 from 56.0 at the end of January. The Services Index rose to 56.7 from 52.2 at the end of January. Those increases caused the Composite Index to climb to 56.0 from 51.9 at the end of January.

Consumer Confidence, as measured by The Conference Board, declined to 110.5 in February. Also, January’s reading was revised down to 111.1 from the 113.8 originally reported.

The Leading Economic Indicators index from The Conference Board declined by 0.3% in January following a 0.7% increase in December.

This was the first decline in the index since February 2021. Causes of the decline were rising claims for unemployment insurance, a decline in consumer confidence, falling stock prices and a shorter average work week in manufacturing.

The Markets

The S&P 500 fell 3.71% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 3.91%. The Russell 2000 lost 4.56%. The All-Country World Index (excluding U.S. stocks) declined 2.81%. Emerging market equities retreated 2.83%.

Long-term treasuries rose 2.67% for the week. Investment-grade bonds increased 0.33%. Treasury Inflation-Protected Securities (TIPS) added 1.06%. High-yield bonds gained 0.05%.

In the currency arena, the U.S. dollar rose 0.16%.

Energy-based commodities increased 2.39%. Broader-based commodities rose 3.51%. Gold gained 2.61%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.