Inflation on the shelves means deflation in confidence, study finds

If President Joe Biden and his team want to understand why his approval ratings are currently in the tank — he’s fallen to 41% in recent polls — they should take a quick look at the latest customer survey by Charles Schwab, one of the most American. popular investment platforms.

Political analysts can talk all they want about Afghanistan, Ukraine, hidden mandates, pandemic fatigue, etc. But there’s a key answer in plain sight to anyone shopping anywhere: inflation.

Less than half of investors over 55 feel “confident” that they will achieve their financial goals. This includes 48% of people over 55 who are still working and 49% of those who are retired.

It’s one thing to worry about your financial goals when you’re in your twenties. But even when half of retirees think they won’t join them, that’s a major problem.

Retiree confidence is down from a year ago. And they are down among those aged between 40 and 55 – they are now at 46%, compared to 50% previously.

It all comes down to the fact that a majority of Schwab customers – 58% – say they feel better off financially than they did a year ago. And this is the case, even if 7 million more people have a job than at the same time last year, when hourly earnings increased by almost 6%. Let’s not forget that during this period, the S&P 500 had a strong return of 13%, well ahead of historical averages.

So what gives?

A fifth of Schwab customers cited inflation as their top concern. The percentage citing either inflation or rising interest rates – largely a consequence of inflation – is 26%.

Meanwhile, the 5.6% rise in hourly earnings is overshadowed over the past year by the 7.5% rise in prices, leaving the average worker set back.

Financial concerns in the Schwab survey are also higher among older people, where investors typically hold a lower percentage of their portfolio in stocks and a higher percentage in bonds.

And over the past year, unlike the S&P 500, the bond market has been hit hard by inflation and likely interest rate hikes. The iShares Core US Aggregate Bond Index ETF (AGG), a gauge of the broader bond market, is down 4% year over year.

The survey was conducted in early January, so it didn’t even take into account the most recent official inflation data.

There is good news and bad news to come.

The good news is that the current inflationary panic is almost certainly overdone. It’s not me talking, it’s the financial markets. As I’ve stressed many times, you don’t have to listen to the partisan hacks on either side of the aisle telling you what’s going to happen next to inflation. Money markets have already placed massive trillion-dollar bets, and if anyone knew they were wrong, they could make a fortune betting the other way.

Currently, the comparison between protected and unprotected US Treasury bonds against inflation indicates a 5-year inflation forecast of 2.87%. This is less than half the current inflation rate. And that forecast has been falling since mid-November, when it peaked at 3.14%. So far, in other words, the market is still betting that today’s high inflation will be “transient”. Markets believe this is primarily the result of massive supply chain disruptions, caused by the unprecedented 2-year global experiment of trying to turn off the global economy and then turn it back on, as if it it was a television.

The bad news is that even if inflation fears ease, it may offer only limited benefit to bondholders, including retirees. This is because the bond market is already massively overvalued by historical standards. (And again, it’s not me talking, it’s the numbers.)

Historically, dating back to the 1920s, 10-year US Treasuries have on average provided their holders with an annual return of inflation plus around 1.7%. In other words, retirees, older investors, and conservative investors who sought the safety of bonds for their money still earned a reasonable return on their savings.

Today, the US 10-year Treasury note is yielding 1.92% per year before inflation. So unless inflation hits around 0.2% a year over the next decade, bondholders will be out of luck. And they won’t just get below-average returns. They will likely earn negative real returns. Indeed, the same bond market that proposes to pay you 1.9% per year for 10 years also predicts that prices will rise by around 2.5% over the same period.

So even if inflation fears ease, bondholders could still have a miserable time. Since these are mostly savers over the age of 55, that doesn’t bode well for retirement security — or the political mood, for that matter.

Comments are closed.