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Financial Planning

Please Contact Laura Mansfield for your financial planning needs:


Laura Mansfield
Senior Branch Office Administrator
Edward Jones
265 G East 29th Street
Loveland, CO 80538-7811
(970) 593-9658
laura.mansfield@edwardjones.com

www.edwardjones.com

Rising Demand, Inflation and Earnings: Will the Gains Be Sustained?

Good economic news propelled stocks to new highs last week, with equities, bonds and commodities all rallying. The Dow surpassed 34,000 for the first time, as signs of 1) rising demand (consumer spending), 2) rising inflation and 3) rising earnings all point to an accelerating recovery. Improving trends in consumer spending and corporate earnings will be key factors in extending the durability of the new economic expansion and bull market, while inflation pressures can be problematic if they persist. We'd offer the following takeaways on whether the gains in these three areas can be sustained and what that implies for the markets.

1) Rising demand: Consumers splurge as new stimulus checks arrive, restrictions ease

  • Retail sales soared 9.8% last month compared with February, handily exceeding estimates and marking the second-fastest monthly acceleration in the last 30 years. The boost was largely driven by consumers spending a portion of their $1,400 stimulus checks that were part of the $1.9 trillion American Rescue Plan Act passed in March. Sales increased across all categories, with spending on big-ticket items remaining strong, as motor-vehicles sales rose 15%1.
  • The notable pickup in spending in clothing stores (+18%) as well as restaurants and bars (+13%) suggests that the easing of restrictions and progress in vaccinations are leading consumers to start resuming their typical spending habits1. The gradual return to normalcy bodes well for spending on services, like travel and entertainment, which are not represented in the retail-sales data released last week. We believe there is substantial pent-up demand waiting to be unleashed, which will likely trigger a rebalance in consumer spending as the year progresses away from goods and towards services.
  • Will the gains be sustained?
    • It is reasonable to expect a pullback in spending as the one-time benefit from the government transfers fades. However, the three rounds of stimulus checks since last year have left consumers flush with savings. The U.S. personal saving rate stands nearly twice its pre-pandemic level. Assuming consumers reduce their savings as uncertainty subsides and the economy reopens, consumption will likely continue to rise, but at a more moderate pace. Also, the expected pickup in hiring and slowdown in job cuts will support incomes, potentially offsetting the need for further government assistance. And unlike the post-financial-crisis recovery, consumer balance sheets are healthy, with household net worth at record levels, courtesy of a rising stock market and home prices.
       
      Retail sales surge amid stimulus checks and reopening
      Select retail-sales categories % change in March from February % change from pre-pandemic peak
      Building Materials 12% 32%
      Motor Vehicles 15% 27%
      Clothing 18% 2%
      Restaurants & Bars 13% -5%
      Total Retail Sales 10% 17%

      Source: FactSet, 4/15/2021

2) Rising inflation: Prices jump on easy comparisons, strong demand and supply disruptions

  • With the inflation debate heating up this year, all eyes were on consumer prices last week. The Consumer Price Index (CPI) rose 0.6% in March from February and increased 2.6% from year-ago levels, the most since 2018. Energy was a major factor behind the jump, as gasoline prices rose almost 23% year-over-year. Core CPI, which excludes food and energy and better reflects the underlying trends, increased a more modest 1.6%, but also surprised slightly to the upside1.
  • The pickup in inflation is attributable in part to easy comparisons from last year when lockdowns during the height of the pandemic led to broad price declines. However, higher prices also reflect the improvement in demand from consumers that showed up in the strong retail sales discussed above. Global supply disruptions to production contributed to higher inflation for goods, while prices for hard-hit services, such as hotels and airfare, also rose last month, getting a boost from the economic reopening.
  • Even with inflation data coming in hotter than economists expected, long-term bond yields declined, and market-based inflation expectations were largely unchanged for the week. In our view, this indicates that markets have been anticipating inflation pressures for a while now. The muted reaction also speaks to the Fed's communication efforts, conveying the view that policymakers will look through any temporary price increases.
  • Will the gains be sustained?
    • The trend in the next couple of months will likely be that of higher prices, as inflation in April, May and June of last year collapsed. Prices paid in the production process have risen, and companies will likely pass along the price increases to consumers with a small lag. Yet it remains unclear whether these pressures will persist beyond this year when the economy returns to its normal state. In our view, inflation will not run too hot for too long. The factors that contributed to low inflation during the previous expansion could again exert more downward pressure on prices than expected.
    • In the near term, inflation readings could be a source of volatility, but even if inflation continues to surprise to the upside this year, that won't deter the Fed from maintaining its patient approach on policy. Under its new inflation-averaging strategy where policymakers seek to achieve inflation that averages 2% over time, the threshold for tightening is higher. For example, to make up the inflation shortfall over the last three years, the Fed's preferred measure of inflation would need to average 2.3% over the next three years.

Inflation pressures won't likely trigger Fed action unless they persist beyond 2021

  Inflation pressures won't likely trigger Fed action unless they persist beyond 2021

Source: Core PCE YoY % change, Factset, Edward Jones

The graph shows inflation trends as measured by the personal consumption expenditures price index. Inflation is expected to accelerate this year as demand recovers. Prices also jumped in 2011 but the inflation pressures quickly subsided as growth slowed.


3) Rising earnings: A positive start to a likely record-breaking earnings season

  • Earnings kicked off last week with several mega- and regional banks reporting first-quarter results. Corporate profits for all 13 banks comfortably exceeded estimates, driven by lower credit costs, robust trading, and investment banking revenue, partly offset by weak loan demand. The anticipation of a strong profit rebound has helped the financial sector return 19% this year, outperforming the S&P 5001. But the rally has also set a high bar for companies to clear. Even though actual earnings topped estimates by 36% on average for the 13 banks that reported, the average one-day performance following the earnings releases was a marginal -0.2% decline2.
  • S&P 500 earnings are expected to grow almost 25% in the first quarter, the strongest growth rate since 20181. Fiscal stimulus, along with the reopening of the economy as vaccine momentum accelerates, is poised to drive healthy revenue growth compared with last year's levels. Profitability is also expected to recover, with investors looking for results to shed some light on the impact of input cost pressures and supply constraints.
  • Will the gains be sustained?
    • Forward earnings are now exceeding the 2019 peak level by 3%1. We think that above-average economic growth over the next two years could translate into robust revenue and earnings growth for corporate America. Following the last three recessions, earnings continued to grow by an average of 83% once they reclaimed their prior peak (120% after the 1990-1991 consumer debt unwind, 70% after the tech bubble, and 60% after the Great Financial Crisis)3. Potential corporate tax hikes could clip some of the growth in 2022 but will likely be modest and won't derail the upward trajectory, in our view.

Market implications:
We believe economic and corporate fundamentals will continue to improve beyond the coming quarter and year, but the rate of change will slow. The upcoming transition from recovery to expansion implies that we remain in the favorable part of the business and market cycles. However, equity returns are likely to moderate, and pullbacks are likely to become more frequent, consistent with midcycle conditions. A short-lived inflation scare will not be enough to shift the Fed's view, but price pressures that persist is a medium-term risk worth monitoring.

Angelo Kourkafas, CFA
Investment Strategist

Sources:
1. Bloomberg
2. FactSet, based on earnings from JP Morgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), US Bank (USB), Truist Financial CorpTFC, Goldman Sachs (GS),Citi Bank (C), FRC, Morgan Stanley (MS), PNC, State Street Corp STT, Citizens Financial Group (CFG), Bank of New York Mellon (BK)
3. FactSet, Edward Jones calculations

Weekly market stats

Weekly market stats
INDEX CLOSE WEEK YTD
Dow Jones Industrial Average 34,201 1.2% 11.7%
S&P 500 Index 4,185 1.4% 11.4%
NASDAQ 14,052 1.1% 9.0%
MSCI EAFE* 2,299.28 1.6% 7.1%
10-yr Treasury Yield 1.59% -0.1% 0.7%
Oil ($/bbl) $63.16 6.5% 30.2%
Bonds $114.54 0.3% -2.4%

Source: Factset, 4/16/2021. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *Source: Morningstar, 4/18/2021.

The Week Ahead

Important economic data being released next week include the LEI index and the PMI composite.

Review last week's weekly market update.

Important Information:

The Weekly Market Update is published every Friday, after market close. 

This is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Past performance does not guarantee future results.

Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment.

Diversification does not guarantee a profit or protect against loss in declining markets.

Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

Dividends may be increased, decreased or eliminated at any time without notice.

Special risks are inherent in international investing, including those related to currency fluctuations and foreign political and economic events.



Please Contact Laura Mansfield for your financial planning needs:


Laura Mansfield
Senior Branch Office Administrator
Edward Jones
265 G East 29th Street
Loveland, CO 80538-7811
(970) 593-9658
laura.mansfield@edwardjones.com
www.edwardjones.com





For important additional information related to this email, visit https://www.edwardjones.com/disclosures/email.html. Edward D. Jones & Co., L.P. d/b/a Edward Jones, 12555 Manchester Road, St. Louis, MO 63131 © Edward Jones. All rights reserved.

February 16, 2021

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Near the end of 2020, the Department of Labor released the final version of the new prohibited transaction exemption, affecting disclosures for rollover recommendations. The Department of Labor noted last week that it would move forward with implementation and enforcement, and the Employee Benefits Security Administration indicated it would continue to perform outreach to determine how the exemption could be improved.
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Last week, Federal Reserve Chair Jerome Powell urged a "societywide commitment" to get Americans back to work and achieve maximum employment. The Fed has indicated that it will strive to keep borrowing costs low, but Powell noted that achieving the employment goal "will require more than supportive monetary policy."
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ESTATE & ELDER PLANNING
Some of your clients might be confused about what the SECURE Act means for their IRAs and estate plans. This article walks through planning implications related to beneficiary designations and touches on topics such as Roth conversions and trust planning. (As you're helping your client families plan in relation to the SECURE Act, use strategies in the Adviser's Guide to Financial and Estate Planning -- Volume 1 is open to all AICPA members.)
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RETIREMENT, INVESTMENT & INSURANCE PLANNING
Clients who missed their initial window for signing up for Medicare have until March 31 during the current general enrollment period to address the situation. This overview explains Medicare enrollment rules, options such as Advantage Plans and Medigap, and potential penalties for late enrollment. (PFP Section members can read this guide for in-depth planning strategies related to Medicare and paying for health care in retirement.)
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People with employer stock in a 401(k) account could realize tax savings through special rules related to net unrealized appreciation for such a holding. This article describes when this approach is most useful, as well as key factors to keep in mind. (For more great information on retirement planning, see the Guide to Practical Retirement Planning4th Edition, which is open to PFP Section members only.)
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Whole life insurance can provide certain advantages for clients' families, including a tax-free death benefit that can offer certainty and stability. In addition, this article notes that the structure of these products means that they typically become more efficient when they are held for longer periods of time. (Listen to this podcast, courtesy of the PFP Section, for more on what to do and what not to do with life insurance.)
 Full Story: ThinkAdvisor (free registration) (2/8) 
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TAX TOPICS
The pandemic has created challenges for taxpayers and practitioners, but there are various kinds of penalty relief that might help, including first-time abatement and reasonable cause. Waiting until taxes are fully paid before requesting penalty abatement can be a wise move.
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Taxpayers investing in qualified opportunity funds can select between two sets of regulations for the 2020 tax year. Here is a closer look at the regulations, including how they treat Sec. 1231 gains.
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TIMELY PLANNING TOPICS
The Small Business Administration (SBA) announced last week that it is updating the Paycheck Protection Program's processes to accelerate the flow of funds to small businesses. Certain applications have been held up by additional validation checks, and the SBA said the changes were designed to clear bottlenecks while "maintaining the integrity" of the program.
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YOU AND YOUR PRACTICE
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AICPA PFP NEWS
The new approach to retirement planning: Gamification
Creating a meaningful experience for your clients has become even more important over the past year. Mackey McNeill, CPA/PFS, has gamified her process to bring fun to retirement planning. In this episode of the PFP Section podcast, she shares her approach, step by step, including:
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Are your clients coming to you for advice in all areas of their personal finances? You can help them by reminding them that you're their primary point of contact for all things planning. AICPA members can use the Personal Finance Scorecard, courtesy of the PFP Section, with clients to help identify planning needs.
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The AICPA's Personal Financial Planning Section is the premier provider of information, tools, advocacy and guidance for advisors who specialize in providing estate, tax, retirement, risk management and/or investment planning advice to individuals, families and business owners.

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