Bob’s Journal for 1/13/22
Fast Changes in the Markets
Investors typically expect the future to be much like the recent past. That hasn’t been the case so far in 2022.
For most of 2021 (and even before that), growth and technology stocks were the big winners. That started to change late in the year but didn’t receive a lot of attention. The change has accelerated so far in 2022.
Investors seem to be steadily moving away from the growth and technology stocks. Without much attention or fanfare, they’ve been moving into stocks that couldn’t find buyers a couple of years ago. Those are stocks of financial and energy companies.
Few investors noticed, but over the last 12 months the financial sector of the S&P 500 is up over 35%, and the energy sector is up almost 55%.
That’s one reason my recommended Oakmark (OAKMX) fund is having such strong returns. The largest sector in the fund by far is financial services.
Also, stock indexes set record highs on a regular basis in 2021. They’re down so far in 2022, but that doesn’t mean all stocks are down.
In fact, when stocks are broken down into different characteristics, many types of stocks are doing well. The problem for index investors is that the growth and technology stocks did so well the last few years that they now dominate the returns and volatility of the indexes.
The technology sector is the largest percentage of the S&P 500 than it’s ever been, and by a significant amount. That’s good for index investors when tech stocks are doing well. But it’s bad for index investors when tech stocks tumble.
While tech and the indexes have been tumbling, stocks investors avoided the last few years are doing well, according to an analysis from Bespoke Investment Group.
So far in 2022, stocks with the highest valuations are down 5% to 8% on average. Those are the stocks that kept rising the last couple of years. On the other hand, stocks with the lowest valuations are up 3% to 6% in 2022.
In addition, stocks with no dividends are among the biggest losers in 2022. Stocks with the highest dividend yields are, on average, the top performers so far this year.
This could be a brief shift in investor preferences. Perhaps they are rebalancing portfolios and cashing in some of those high returns of the last few years. But it could be that change in Federal Reserve policy and other shifts in the environment are causing longer-term changes in investment strategies.
Don’t Forget: New RMD Rules in 2022
Those routine calculations of required minimum distributions (RMDs) from IRAs and other retirement plans change in 2022.
In 2021, the IRS issued new life expectancy tables to be used to compute the RMDs beginning in 2022. The tables have slightly longer life expectancies than the old tables, making RMDs a little bit lower under the new tables than the old ones.
Owners of IRAs and other retirement accounts don’t make any adjustments. You simply look up your current age in the new tables for 2022 instead of the old tables. You use the life expectancy factor you find to compute your RMD.
Beneficiaries who inherited retirement accounts must take some extra steps.
A beneficiary takes the new life expectancy table and goes back to the year he took his first RMD after inheriting the RMD.
Suppose you took the first RMD in 2019 and were age 57. It now is three years later. You look up the life expectancy factor for a 57-year-old in the new table (it’s 29.8). You then subtract three from the factor. Your life expectancy factor for 2022 is 26.8.
The new rules and life expectancy tables are in free IRS Publication 590-b, available on the IRS web site.
These lower RMDs might be short-lived. The pandemic has caused life expectancy to decrease in the United States. The IRS plans to update the tables every few years. The next tables are likely to have shorter life expectancies and higher RMDs.
Be Ready for Higher Life Insurance Rates
You might want to lock in life insurance premiums now, before they increase.
You’ve probably seen the data showing that life expectancy in the U.S. has been declining. There was some decline before the pandemic, due to the opioid epidemic and some other factors.
But the pandemic caused a further decrease in life expectancy.
The death rate in the United States among people ages 18-64 increased 40% from pre-pandemic levels, according to the CEO of insurer OneAmerica, Scott Davison.
Most of the deaths are not listed as due to COVID on the death certificates, according to Davison. Disability claims also are increasing.
Several sources estimate that life insurers in aggregate paid about $35 billion pandemic-related death claims in 2021.
Insurance companies are starting to reflect lower life expectancy by charging higher life insurance premiums. Group life insurance premiums are the first to feel the pain. Term life insurance premiums also are likely to increase very soon. Permanent life insurance policy premiums also are going to increase.
Davison said all insurers are reporting similar results. The higher death rates among working-age Americans are likely to hurt insurance company profits in the short-term and cause premiums to rise.
The Data
The Consumer Price Index (CPI) continues to show inflation is high and widespread. The CPI increased 0.5% in December and 7.0% over 12 months. The 12-month increase is the highest since 1982, and December is the third straight month the 12-month increase exceeded 6%.
The good news is that the 0.5% monthly increase in December was less than the 0.8% increase in November.
Excluding food and energy, the core CPI increased 0.6% in December and 5.5% over 12 months. That’s the highest 12-month increase for this measure since 1991 and well above November’s 4.9% level.
The ISM Services Index declined sharply to 62.0 in December from 69.1 in November. The November level was the all-time high in the index. Any level above 50 indicates growth in the sector, and a level above 60 indicates strong growth.
December was the 10th consecutive month the index was above 60. It also was the 19th consecutive month the index indicated growth in the sector.
Optimism increased a little among small business owners, according to the NFIB Small Business Optimism Index. The index for December was 98.9, a small increase from 98.4 in November.
Small business owners consider to be concerned about rising prices and the inability to hire enough qualified workers.
Last Friday’s Employment Situation report for December was well below expectations. The report said only 199,000 new jobs were created in December, though November’s estimate was revised higher to 249,000 from 210,000.
Economists were expecting at least twice as many jobs, especially after the previous day’s report from ADP estimated 807,000 private sector jobs were created in December.
Despite the disappointing December number, a record 6.4 million jobs were created in 2021, and the economy averaged 537,000 jobs per month.
But there still are 3.6 million fewer jobs filled than before the pandemic. Most of the job losses are in leisure and hospitality, sectors which still have payrolls 7% lower than before the pandemic.
Average hourly earnings increased another 0.6% in December and now have increased 4.7% over 12 months. That’s down slightly from the 4.8% rate in November.
Consumer credit in November increased by its largest amount in 20 years, according to the Federal Reserve.
Credit increased by $40 billion in November, which follows a $16 billion gain in October.
Revolving credit, which is mostly credit cards, increased at a 23.4% rate for the month, which is the highest monthly percentage increase since October 1998. Even so, the level of revolving credit is below the pre-pandemic peak.
Nonrevolving credit, which is mostly vehicle and student loans, increased at a 7.4% rate for the month.
New unemployment claims increased by 7,000 to 207,000 in the latest week. Though higher than the previous week, it’s still among the lowest levels in the history of the data.
Continuing claims also increased a bit to 1.754 million from 1.718 million the previous week, which was revised higher from the initial report.
Factory Orders in November were 1.6% higher than in October, and October’s number was revised from a 1.0% increase above September’s level to a 1.2% increase.
But orders for core capital goods, which are considered a good measure of business investment, were unchanged in November.
The Markets
The S&P 500 lost 1.63% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 1.45%. The Russell 2000 declined 3.28%. The All-Country World Index (excluding U.S. stocks) gained 0.07%. Emerging market equities rose 2.02%.
Long-term treasuries lost 0.10% for the week. Investment-grade bonds fell 0.94%. Treasury Inflation-Protected Securities (TIPS) declined 0.55%. High-yield bonds retreated 0.47%.
In the currency arena, the U.S. dollar declined 0.77%.
Energy-based commodities increased 3.57%. Broader-based commodities rose 2,47%. Gold gained 0.46%.
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.
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