Weekly Wrap: Tax Guide, Funds for an IRA, and Super Bubbles

Inflation, Super Bubbles, and Putting Market Volatility Into Perspective

January's number is in: Inflation has risen 7.5% over the past year. As a result of this larger-than-expected number (the highest in 40 years), market watchers expect the Federal Reserve to be more aggressive with interest-rate hikes this year. Morningstar chief economist Preston Caldwell expects some inflation relief by midyear as supply constraints loosen. Read more of his insights in "7 Charts on the Big CPI Rise, Fed Rate Hike Outlook."

What might that mean for markets this year?

This week's guest on The Long View podcast, GMO's Jeremy Grantham, talked about why he thinks the U.S. market is in what he calls a "super bubble" that spans stocks, bonds, real estate, and even commodities. "You're playing with fire if you combine the lowest interest rates and the highest bond prices in history with the highest stock market in history and the highest multiple of family income in housing," he said. GMO's co-founder knows a thing or two about market bubbles: He correctly predicted two recent bubbles this century.

Also this week, Morningstar portfolio strategist Amy Arnott compared current market volatility against historical norms in "Putting Recent Market Volatility in Perspective." After examining the numbers, she concluded that the market’s current volatility level isn’t too far outside of its historical range: "Based on past history, periodic market downturns are entirely normal and to be expected. Over longer time periods, the market tends to be self-correcting; certain areas may get frothy and reach bubble status, and overall market valuations may overshoot the mark, but periodic downturns are a way of correcting for the excess."

Of course, only time will tell whether the market has achieved bubble status, super or otherwise. But given stubborn inflation and the uncertainty around interest rates, one thing is pretty likely: It’s going to be a volatile year.

Promising Dividend-Growth Stocks

Dividend-growth stocks--those that have a history of increasing their payouts over time--have plenty going for them. For starters, the management teams at these companies are focused on delivering a growing cash stream to their shareholders--a shareholder-friendly mindset. Moreover, firms that consistently ratchet up their dividends are usually profitable and financially healthy, a plus in any market climate.

In my Our Picks column this week, I shared seven undervalued and heavily weighted stocks in the Morningstar Dividend Growth Index. Dividend-stock fans should also take a look at my colleague Lauren Solberg's dive into "Why Energy Stocks Are Gushing High Dividends." Solberg observes, "The energy sector's dividends are growing faster than any other part of the U.S. equity market". To find out why, read her article.

Funds for an IRA

If you want to find a procrastinator, look no further than the typical IRA investor. According to many IRA providers, investors often wait to contribute to IRAs until the mid-April deadline. On top of that, some leave those contributions sitting in cashlike accounts, thinking that they’ll move the money into an appropriate investment "someday."

Talk about leaving money on the table! "Ideally, if you can fund your IRAs as early as you possibly can and get that money invested, that gives the money more time to compound," reminds Morningstar's director of personal finance and retirement planning, Christine Benz. "And it's especially important for younger investors because, over time, the combination of either not making the contribution or not actually getting the money invested in something can drag on the portfolio's long-term returns."

Not sure what to invest your IRA dollars in? Morningstar's director of fund research Russ Kinnel shared some ideas in "3 Funds for an IRA"; Morningstar director of global ETF research Ben Johnson countered with "3 ETFs for an IRA." Not to be outdone, Benz suggested what types of investments you should keep out of a taxable account--which means that these are exactly the types of investments to tuck into a tax-friendly IRA wrapper.

And speaking of wrappers, we’ve wrapped up our latest tax-related content in our annual Tax & IRA Guide.

Stock of the Week: Disney DIS

Disney reported blowout numbers for the quarter, with notably strong subscriber growth numbers for Disney+ and improving revenues in its parks business. "The ongoing pandemic and coronavirus variants continue to create uncertainty for the near term, but the continued growth in bookings and per capita spending offer reassuring signs for a return to long-term growth," said Morningstar senior analyst Neil Macker. He reiterated our wide Morningstar Economic Moat Rating and $170 fair value estimate.

--Susan Dziubinski

Editor's Picks

7 Undervalued Stocks with Growing Dividends These heavily weighted names in the Morningstar U.S. Dividend Growth Index are all at least 10% undervalued.

Morningstar's 2022 Tax and IRA Guide Strategies and investment ideas for lessening the tax bite.

ETFs Have a Tax Advantage Over Mutual Funds ETFs' structure gives them a leg up.

Morningstar's Guide to Setting Your Withdrawal Rate Here's how to tap into your nest egg when the time comes.

Options-Trading Funds Don't Have to Be Scary Although complicated, these strategies can help diversify a portfolio.

7 Charts on the Big CPI Rise, Fed Rate Hike Outlook Inflation pressures broadened in January, and expectations for a bigger move by the Fed grew.

Portfolio Planning and Personal Finance With Christine Benz

Which Investments to Keep Out of Your Taxable Account Vanguard's recent target-date fund distribution illustrates a simple fact: Some investments are structurally a poor fit for taxable accounts.

Don't Wait Until Tax Day to Fund Your IRA Wind up your 2021 tax year before April 18.

Mutual Funds and Exchange-Traded Funds

3 Funds for an IRA What is suitable now?

4 Funds Feeling Outflow Pressure These funds saw large outflows in 2021 as measured by percentage of assets.

Energy Funds' Leading Returns Defy the January Trend Only a small number of Morningstar Categories managed to benefit in a month filled with volatility.

2 International-Stock Funds to Watch These funds recently were added to the Morningstar Prospects list.

How Retirees Can Avoid the 'Tax Torpedo' Some retirement researchers are challenging the traditional thinking on tax efficiency, Social Security, and drawdowns.

Stocks

Biopharma Forecast: 3 Bulls and 2 Bears Our bearish calls on drugs from AbbVie and Pfizer put downside pressure on the firms' valuations.

Has Decline in Homebuilder Stocks Created Opportunity? What Morningstar's analyst thinks of D.R. Horton, Lennar, and Toll Brothers today.

Putting Recent Market Volatility in Perspective Stocks have been more jittery than usual, but volatility is to be expected.

What the Ukraine Crisis Means for Oil Prices Russia will get its oil to the global market, whether or not it invades Ukraine.

Is Competition Holding Back Intel's Stock? Though AMD and Nvidia may gain market share, Morningstar's analyst thinks this chipmaker is undervalued.

11 Newly Cheap Tech Stocks Investors see the number of undervalued technology names almost double in a month, including Salesforce and Sabre.

Why Energy Stocks Are Gushing High Dividends Dividend growth has surged as energy companies focus on returning cash to investors.

Advisor Insights

New IRS Rules Help Young IRA Owners IRA owners under the age of 59.5 now may be able to withdraw penalty-free money from their accounts.

Rekenthaler Report

Wall Street Ethics: The Good, Bad, and Ugly When the Street deserves brickbats--and when it doesn't.

From the Archives: Whatever Happened to Emerging-Markets Stock Funds? The new hot thing became a long, slow fizzle.

The Long View Podcast

Jeremy Grantham: The U.S. Market Is in a Super Bubble The GMO strategist and perma-bear thinks the major asset classes are inflated but calls value stocks "pretty darn cheap."

The Short Answer

Are Your Bond Holdings Vulnerable in a Rising-Rate Environment? The "duration stress test" can serve you well in case interest rates go up.

Commentary

Are You Likely to Misuse Your Portfolio? The author of "In Pursuit of the Perfect Portfolio" shares his insights on the history of Modern Portfolio Theory and the pioneers that changed portfolio management.

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