A client wrote "With all the recent inflation talk..."

A client wrote:

“With all the recent inflation talk going on, thought I'd ask for a quick refresher. If someone were to compare our policy-based retirement plan vs. traditional IRA that might be invested in S&P, which is more 'protected' against inflation and why? In other words, if I were to make the same annual contribution into both the traditional IRA - S&P and the policy account, which is better off in inflationary times?”

Well, let’s take it point-by-point, and think long-term:

                                                            IRA                                           

Stock market sensitivity:                       enormous/direct                                

Increasing interest rate sensitivity:    negative (price drop) -                        

Cash value stability:                               negative (market drop is bad)                

Asset used to fight inflation?               stocks useful? a myth! Just look at the current markets, and volatility!

                                                            Whole Life policy

Stock market sensitivity:                       none

Increasing interest rate sensitivity:    positive (eventual dividend rate growth)

Cash value stability:                               positive (unaffected by market drop)

Asset used to fight inflation?               Div rate lags but follows increasing int rates

And there’s the (current) myth of non-correlated assets argument: interest rates up, bonds down, but then the stock market goes up as traders/investors anticipate a recovering economy. Not today. The textbook needs a revision.

The core point here is that the stock market is getting hammered by increasing interest rates. For years, as the fed kept interest rates low, the stock market went higher as it was the only place to invest for the man on the street (aka 401K investor), and for other bigger investors.  After all, who invests in bonds with a 1% rate? But the Fed is going the other way now, to the tune of trillions of dollars in bond divestitures and allowing bonds (in their portfolio) to mature without replacement. 

Add to that the point that companies of various industries and sizes are facing a reckoning.  How many retail companies will Amazon replace?  Auto industry? Think EV. Tech companies? Think easy money harder to get.

The Fed’s charter is to fight inflation and has precious few tools to do so. Interest rates are going up and that is a negative for the economy. That, in turn, is bad for stock prices. There is an argument to be made that we’re about to pop a stock market bubble caused largely by the Fed’s cow-towing to political pressure for the last 14 years. Again, interest rates were kept ridiculously low to boost the stock market and the economy but the piper’s calling, to get paid.

Here’s my take on inflation: the Fed will fight the obvious stuff, with causes from government money (covid-related), distribution problems, fuel prices (to some degree) but…AND IT’S A BIG BUT…inflation is coming in from geopolitical forces (think e.g., Ukraine and then Russian fuel), climate change (think loss of habitable land and farm land due to forest fires and rising seas, drought and flooding). The Fed has no tools for that.

I don’t consider myself a follower of conspiracy theories, but I expect that, in the future, the Fed’s announcements of inflation rates will take on acceptable levels…but what sounds acceptable will not save the companies and/or markets sensitive to the realities underlying the economy.

I don’t view my job as pushing for short-term plays.  I think the turbulence we’re seeing will not disappear quickly. There will be days when the stock market goes up and there will be champagne corks popping. There will also be days where the opposite occurs. 

There is a great deal of rebalancing to be done as society (both individual and industrial) contends with all the changes. What that suggests to me is continued and growing volatility. Volatility is the enemy for the long-term, and you are a long-term investor. Retirement savers are playing the long-term. 

Whole Life policies like yours are steady-growth vehicles. 

The S&P is volatile and will continue to be so. So, even if you can take advantage of the market upswings, where will you be on downdrafts? What recoveries will you need? Oh, and the markets improvements since 2009 is, as mentioned earlier, based on exceedingly low interest rates.  It is/was not normal.

And last, think 50 years out. We don’t work on 1-year “our economist thinks…” plans. We work on getting you solid and ready for your later years.…and that as you age, simplicity with consistency will be prized.