The current job
market landscape is a warning sign of how painful the U.S. economy is for many,
as over 225,000 Americans filed for first time-unemployment claims at the beginning
of March.
But then, the February
employment report showed the U.S. economy added 678,000 jobs in the month,
pushing the unemployment rate down to 3.8%. Job growth was widespread, led by
gains in leisure and hospitality, professional and business services, health
care, and construction.
Without engaging in
the controversial debate as to whether the current job market landscape does or
does not support the argument for additional targeted stimulus, there is
another side to this conversation that we need to remember too: continued
monetary stimulus and more government spending might lead to inflation, maybe
even hyperinflation, which could be bad for your retirement.
As such, there are
two data sets that are worth examining when thinking about inflation and the
impact on your retirement nest egg: the rise in the 10-year Treasury yield and the
price of West Texas Intermediate Crude oil. The first might foreshadow inflation
whereas the second might contribute to it.
10-Year Treasury Yields
are Climbing
The yield on the
10-year U.S. Treasury has climbed about 50 basis points so far in 2022 and
appears poised to break that purely-psychological 2.00% threshold.
And the climb in
bond yields will absolutely impact the stock market (to what extent is anyone’s
guess). In very simple terms, when bonds are paying higher yields, they can
become more attractive to many investors, causing them to consider moving out
of lower-yielding equities and into the steady income of bonds. In other words,
there is an inverse relationship between stocks and bonds. This is the
push-pull-dance that has been going on between the bond and equity markets
forever.
Consider one of the
ways in which Treasury yields will affect you directly: mortgage rates.
As yields rise,
banks realize that they can charge more interest for mortgages of similar
duration (which is why rising rates are generally good for the Financials
sector). And while the correlation is not perfect, generally speaking, the 10-year
Treasury yield affects 15-year mortgages and the 30-year yield impacts
30-year mortgages.
Further, as rates
rise, housing becomes more expensive and could depress the housing market,
which in turn impacts GDP growth, which could impact the stock markets, which
could cause companies to raise prices, which could lead to more inflation – and
so on and so on and so on.
Oil Prices Climbing
West Texas
Intermediate Crude is trading at over $100/barrel, a price not seen since the
summer of 2014. But the increase so far in 2022 is dramatic.
Oil and inflation are linked because oil is such a
huge input into our economy. And as a barrel of oil rises in price, that means
fueling our cars and heating our homes gets more expensive.
But oil is also used in the production of plastics
too. So as the input prices (oil) rises, so does the end-product (that plastic
gadget). That means that plastic gadget is more expensive, which is the very
definition of inflation.
Inflation Isn’t All Bad,
Right?
The glass-half-full
economist would rightly suggest that higher inflation is the product of a
healthier economy and rising demand, so a move toward higher longer-term rates
is actually a sign that confidence in the economic rebound is also rising.
But at some point,
as the rebound from the COVID-induced bottom runs out of steam, inflation
pressures could cause the Fed to intervene by hiking rates faster and more
often than expected – maybe even an overcorrection.
Remember when the
Fed initiated its first rate hike at the beginning of 2016? There was a 10%
correction in the market. And then the stock market corrected again in 2018
when Wall Street thought the Fed had hiked rates too high.
And by all
estimates, the Fed will start hiking rates in mid-March.
Inflation & Your
Retirement
On a personal level, inflation affects how much your
retirement dollars are worth. And over time, it can take a serious
bite out of your nest egg.
Understanding how inflation might hurt your retirement
strategy is a requirement to help plan for enough money to last through your retirement
years.
Talk to your financial professional to mitigate and account
for inflation as you create various retirement scenarios and goals. Failing to
account for inflation is a mistake you can easily avoid. Your financial professional
can help.
