Bob’s Journal for 10/6/22

Safe 5% Yields are Back

The Federal Reserve’s been increasing interest rates and tightening the money supply at the fastest pace in decades.

Because of that, market interest rates moved from historically low levels up to levels we haven’t seen since the financial crisis.

That’s not good for the economy but it helps savers and conservative investors.

The highest safe yields you can find right now usually are in multi-year guaranteed annuities (MYGAs) from top-rated insurers. Recently, the guaranteed yield on a number of five-year MYGAs topped 5%.

Your annual yield is guaranteed for the entire five-year term of the MYGA, and your principal’s value is guaranteed not to decline. The interest compounds tax-deferred within the annuity.

In addition, on many of the MYGAs you can withdraw up to 10% of your principal each year without a penalty.

Stan the Annuity Man (Haithcock) recently described a MYGA from Nationwide that guarantees a yield of 5.15% each year for five years on a deposit of $100,000 or more. Lower deposits earned a yield of 5%.

The yields on MYGAs change every seven to 10 days, so this week’s best deal might not be next week’s best.

The sweet spot in MYGAs now is the five-year term. Also check rates on bank CDs and brokered CDs offered through your broker. For shorter terms, some CDs are competitive with MYGAs. A good way to check the latest yields on MYGAs is through www.stantheannuityman.com.

Medicare Part B Premiums Decline for 2023

The base Part B Medicare monthly premium will decline to $164.90 in 2023, a $5.20 decline from 2022’s $170.10 monthly premium. Also, the annual Part B deductible will decline to $226 in 2023 from $233 in 2022, according to the Centers for Medicare and Medicaid (CMS).

The 2023 premium partially reverses the substantial increase from 2021 to 2022.

Part of the increase for 2022 occurred because Congress froze Medicare premiums for 2021 in response to the coronavirus pandemic. That increase was imposed in 2022 along with the regular 2022 increase.

A substantial part of the 2022 increase was to create a cushion for coverage of the then-recently approved Alzheimer’s drug Aduhelm.

Subsequently, Medicare decided to cover the drug only in limited circumstances. Some advocates asked that the Part B premium be reduced during 2022, but CMS declined.

The lower Part B premium for 2023 follows a CMS projection that the average Part D prescription drug premium for 2023 would decline, which I discussed in last week’s Bob’s Journal.

CMS also announced the income brackets and rates for the Medicare premium surtax for 2023, also known as IRMAA (income-related monthly adjustment amount), that is imposed on higher income beneficiaries.

The maximum total premium in 2023 will be $560.50, imposed on modified adjusted gross incomes equal to or greater than $500,000 for individuals and $750,000 for married couples filing jointly.

2022: The Year of Wealth Destruction

The Federal Reserve has been very successful in its effort to reverse the wealth effect it initiated during the financial crisis. Plus, 2022 has been an historic year for wealth destruction through its first three quarters.

The unique characteristic of 2022 is that both stocks and bonds declined by significant amounts. Usually when stocks have a bear market, bonds hold their value or appreciate. But there are unique periods, such as 2022 and the stagflation of the 1970s, when both stocks and bonds decline.

The investment grade bond market lost more market value, almost $3 trillion by the end of the third quarter, than it ever has in a year, according to Bespoke Investment Group.

Stock indexes lost about $13 trillion. That’s a larger dollar loss than in past significant declines, such as the Covid bear market, the financial crisis and the tech stock crash.

When stocks and bonds are combined, their total dollar loss exceeds that of any other period.

The percentage losses so far in 2022 are not historic, though they are significant. The appreciation in stocks the last few years was so extreme that a typical bear market percentage loss (so far) caused the most significant dollar losses ever.

The losses in bonds are unique.

Interest rates on treasury bonds reached their highest levels in decades in the last week of September.

That caused long-term treasury bonds to have a worse year than stocks. The iShares Long Term Treasury ETF (TLT) had a year-to-date (YTD) loss of 30% as of the last week of September. That exceeded the losses of most stock indexes.

This year is by far the worst year for TLT since its inception in 2003.

Investors are so averse to owning bonds in 2022 that even inflation-indexed treasury bonds are losing value despite the year having the highest inflation rates in 40 years. The iShares TIPS Bond ETF (TIP) is down 12.79% for the year to date.

The Data

The Fed’s preferred measure of inflation, the Personal Consumption Expenditure (PCE) Price Index, increased 0.3% in August. That’s up from a 0.1% decline in July.

Over 12 months, the PCE Price Index increased 6.2% as of the end of August. The 12-month increase as of the end of July was revised higher to 6.4%.

Prices for goods increased 8.6% over 12 months, and prices for services increased 5.0%.

The core PCE Price Index, which excludes food and energy, increased 4.9% over 12 months, as of the end of August. The July figure was revised higher to 7.0% (from an initial 6.8%) and was the biggest 12-month increase since December 1981.

The core PCE Price Index increased 0.6% in August, compared to 0.0% in July.

Personal income increased 0.3% in August, the same as in July. Employee compensation increased 0.3% in August while the proprietor’s income increased 1.2%.

Personal spending increased 0.4% in August after declining 0.2% in July. Spending on services increased while spending on goods declined.

The Consumer Sentiment Index from the University of Michigan for September was 58.6. That’s lower than the mid-month flash reading of 59.2 but higher than the reading at the end of August of 58.2.

The September Consumer Sentiment Index is the highest in five months. Sentiment about current conditions improved but expectations for the future declined.

The ISM Manufacturing Index for September was 50.9, down from the 52.8 reading in August. Any number above 50.0 indicates the sector is expanding. New orders and employment declined and the prices’ subindex declined to the lowest level since June 2020.

Services sector growth decreased a little in September, according to the ISM Non-Manufacturing Index. The index declined to 56.7 from 56.9 in August.

There was a sharp decline in the number of job openings in August, according to the JOLTS (Job Openings and Labor Turnover Survey) report. The number of open jobs declined to 10.053 million in August from 11.17 million in July.

That’s the lowest level of job openings since June 2021. The record was 11.9 million in March 2022. Openings still are above pre-pandemic levels.

The number of people quitting their jobs in August was about the same as in July.

Factory orders were unchanged in August from July’s level. In July, orders had decreased 1.1% from June’s level.

But excluding transportation, orders increased 0.2% in August after declining 1.1% in July.

The third and final estimate of GDP for the second quarter matched the second estimate. GDP grew at an annualized rate of negative 0.6%, which compares to a negative 1.6% rate for the first quarter.

The estimate for consumer spending was increased but was offset by a decline in exports.

The Chicago PMI tumbled to 45.7 in September from 52.2 in August. A reading below 50.0 indicates the sector is contracting.

The number of private sector jobs increased by 208,000 in September, according to the ADP Employment Report. That’s an improvement from the 185,000 jobs created in August.

New unemployment claims declined by 16,000 to 193,000 in the latest week. That’s the lowest level since April.

Continuing claims declined to 1.347 million from 1.376 million.

The Markets

The S&P 500 rose 4.02% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 4.06%. The Russell 2000 increased 6.84%. The All-Country World Index (excluding U.S. stocks) added 6.03%. Emerging market equities climbed 3.13.

Long-term treasuries gained 2.81% for the week. Investment-grade bonds increased 3.33%. Treasury Inflation-Protected Securities (TIPS) added 1.34%. High-yield bonds gained 3.86%.

On the currency front, the U.S. dollar declined 3.49%.

Energy-based commodities increased 6.99%. Broader-based commodities rose 5.37%. Gold gained 6.06%.

Bob’s News & Updates

My next book will be “Retirement Watch: The Essential Guide to Retiring in the 2020s.” The official publication date is Jan. 3, 2023. You can make a pre-publication order or learn more about the book by clicking here and here, respectively.

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It has received mostly five-star reviews on Amazon for telling 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.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

P.S. Orlando Money Show, Oct. 30-Nov. 1, Omni Hotel ChampionsGate, Florida: Join Steve Forbes, Ed Yardeni, Mark Skousen, Bryan Perry, Bruce Johnstone, Terry Savage, Keith Fitz-Gerald and me. For more information, go to: Carlson.MoneyShow.com. Use code 05774.