2021Q4

As we head into the fourth quarter of 2021, the domestic economic backdrop has vacillated between a strong reflationary trend and muted growth coupled with high inflation.  Quite a range we do admit.  Despite the feds pacifying depictions of transitory inflation, we have seen container shipping up over 300% year over year, home prices up 20% for the year and the 19 commodities on the CRB index are at all-time highs. We are seeing inflation broadening across multiple venues.  Wheat is up 30% and coal is up 35% for the past month alone.  Oil is at its highest level since 2014.  In turn, 7 of the 11 S&P 500 sectors are positive for the quarter and all 11 sectors are positive for the year.  The 10-year yield bottomed around 1% in February and has trended towards the positive from July thru September.  All the while the 10-year has moved from an early quarter 1.4% to 1.48% near quarter-end.  High yield spreads have widened slightly from 3.05 to 3.20 at the end of the quarter, and the steepening of the yield curve remains for the most part unchanged.  The bond market is a great foreteller of the economy and the equity markets.  Given the recent metrics and the unwavering of spreads during the recent bouts of episodic volatility, we maintain that we are still in a growth-oriented market.  Bitcoin is currently around $47,000/coin as the dollar fails to maintain strength and interest rates and inflation remain unabated.

Download the full Quarterly here!

During mid-3rd quarter, the 10-year depressed and with it came some concerns that the market was expressing a slow-down.  In response, we harvested some energy and industrials sector gains.  We used this cash to incrementally add gold and utilities as well as add to our existing REIT exposure.  Shortly after, bull market trends became clearer and our stagnant market fears quickly dissipated.  We exited those positions in order to increase our energy, real estate investment trust (over weighted in public storage and apartment rentals) and commodity exposures.  We do anticipate adding gold and utilities again and with significant weights.  However, timing is very important.  Gold needs more than inflation to appreciate.  Specifically, it doesn’t like rising interest rates like we are seeing with an increasing 10-year treasury.  Utilities usually perform well during depressed growth and moderate inflationary environments.  We anticipate adding those positions sometime 2nd quarter of 2022. 

As we speak, the longest shipping regatta in history is waiting to set sail in Long Beach California.  Currently there are 60 ships backed up in the West Coast harbor.  This is a good illustration of increased demand and continued supply chain bottlenecks.  We think that these supply chain issues will continue thru the beginning of next year and help to maintain upward pressure on inflation, CPI (Consumer Pricing Index) and PPI (Producer Pricing Index).

Please remember we are not in the game of timing the markets, but we can adjust and look to ride the areas where the volatility is manageable and the opportunities for growth seem best positioned.  To time the market, would require us to be precisely correct when to sell and it would also require us to be precisely correct when to buy.  Rarely are both done with precision.  Portfolio rebalancing and reallocating our gains to opportunities that haven’t appreciated is the most efficient way to protect the portfolio.   We look forward to discussing more with you at our next meeting or over the phone when it is convenient for you.  And with that, we are going to get back at it.  Cheers to another strong quarter.

The 401(k) Match is Archaic

We’ll admit it. The title of this article is intended to be provocative.  Yet, we stand by our claim and will defend the fact that 401(k) matching contributions really are akin to dinosaurs in the modern employee rewards portfolio. 

First, let’s recognize why matching contributions exist in the first place.  As 401(k) plans began to surge and outnumber traditional pension plans, the responsibility and cost of creating an income stream in retirement shifted from employers to employees.  Employers deemed it a shared responsibility with the employee to save for one’s retirement.  To execute on that shared responsibility, employers offered matching contributions within the 401(k) plan, meaning that an employee would only receive the company contributions to their account as long as they made contributions from their own money as well. Matching contributions incent employees to save money in the 401(k).

Next, we need to realize that 401(k)s are simply one type of tax advantaged vehicle competing for the hard-earned dollars of employees.  In addition, we’ve got IRAs, Health Savings Accounts (HSAs), Flexible Spending Arrangements (FSAs), 529 College accounts, and the list goes on. All of these ‘accounts’ provide a tax advantage to the person contributing to those accounts. Of particular importance is one of the newest allowed by the tax code: the HSA.  Of even more importance is that HSAs are the most tax-advantaged of any of the accounts noted above.  Many refer to this as the triple tax advantage, and a discussion of such advantage is beyond the scope of this discussion. Rather, we will simply summarize by saying HSAs are better than 401(k)s.

Lets summarize the facts so far. 1) Matching contributions incent employees to save money in the 401(k). 2) HSAs are better than 401(k)s. When summarized together, it’s easy to see how 401(k) matching contributions have become an archaic plan design. 401(k) matching contributions incent employees to save money in a sub-optimal manner, or in an account without the greatest tax advantages to the employees, or in an account that is inferior to another type of account. In the absence of any matching contributions, employees would be advised to put their money into the best account available – the HSA.  This would provide the greatest benefit and advantage to the employee. 

Fortunately, modifying and modernizing the rewards portfolios is relatively easy.  Rather than creating the greatest incentive for employees to save into the 401(k), we might suggest creating the greatest incentive for employees to save into the HSA. Now, if you still want to have a matching contribution in the 401(k) at an even or lesser rate than the HSA match, we’re okay with that too! 

Contributed by Brian Riefepeters of Calder Consulting Group

Connect: (e) Brian@Riefepeters.com (o) 616.235.2442