Gross domestic product grew at an annual rate of 6.9% in 2021’s fourth quarter, according to the initial estimate released by the Bureau of Economic Analysis, literally three times the rate from the third quarter.  The increase reflected increases in private inventory investment, exports, personal consumption expenditures and nonresidential fixed investment.

Total nonfarm payroll employment rose by 467,000 in January. The unemployment rate steadied at 4.0%, the U.S. Bureau of Labor Statistics reported, as more workers entered the job market. Job growth continued in leisure and hospitality, professional and business services, retail trade, transportation and warehousing.

Initial jobless claims for the week ending January 29 came to 238,000, a 23,000 week-over-week decrease. The less volatile four-week moving average, though, was 255,000, an increase of 7,750 from the previous week's number.

The Consumer Price Index for All Urban Consumers rose another 0.6% in January on a seasonally adjusted basis after rising 0.5% in December, the Labor Department reported. Over the last 12 months, the all-items index increased 7.5% before seasonal adjustment. Prices for food spiked and, although those for gasoline dipped a bit, those for electricity rose. All that is considered “non-core” inflation, though, due to these commodities’ volatile costs. And yet core inflation rose by just as much, suggesting a broad-based rise in the index and feeding into the expectation that the Fed will raise target interest rates by 0.5% at its next meeting – as we’ll discuss shortly.

The benchmark 10-year Treasury yield ended January at 1.782%, having started the month at 1.512%.

The S&P 500 stumbled out of the gate in 2022 with a -5.4% January decrease on a total return basis. The CBOE VIX “fear gauge” rose sharply for the month, up 43.3% to 24.83, suggesting that investor confidence in stocks is being tested.

Stocks were mixed globally. In Europe, Amsterdam’s Euronext 100 and Frankfurt’s DAX were down -3.2% and -2.6% for January, while London’s FTSE 100 managed a +1.1% gain.

In Asia, Tokyo’s Nikkei 225 and Shanghai’s SSE Composite declined markedly, falling -6.2% and -7.1% respectively, for the month, although Hong Kong’s Hang Seng, bounced back +3.0% in January after a dismal 2021.

More heat than light is being generated when it comes to figuring out how far and how fast target interest rates are going up in 2022. The Federal Reserve’s initial body language suggested that yes, the Fed funds rate would be rising to combat inflation, and that we could expect a 0.25 percentage-point increase in March with two or three more rate increases before year-end. But that was the thinking a whole month ago. According to CME Group – essentially the interest rate futures’ bookie – odds are 3-to-1 that March’s increase will more likely be 0.5 percentage points. CNBC reports that Bank of America is comfortable with its 5-to-1 bet that there will be as many as seven increases throughout the year.

Oil prices continued to surge as West Texas Intermediate crude increased +14.3% to end the month at $88.15 per barrel. Meantime, inflation hedge gold barely quavered, dipping -1.0% to end the month at $1,796.40 per ounce.

The dollar gained +0.8% in Frankfurt and +0.4% in London through January and was unchanged in Tokyo.

Another month, another double-digit cryptocurrency plunge. Bitcoin, at $38,497 at the end of January, was down -26.1%.

The alternatives to alternatives

Once and for all: You don’t need a self-directed individual retirement account to gain exposure to alternative investments.

Let’s start with the obvious: You can just buy alts – everything that isn’t a stock or a bond or something very close -- straight-up in your brokerage fund, checking account or with the cash in your mattress. Of all the ERISA-qualified retirement plans, though, only self-directed IRAs are eligible to hold cryptocurrencies, commodity futures, precious metals or that most widely held alternative asset: real estate.

If your retirement plan isn’t self-directed, it is implicitly directed by somebody else. That somebody should be a fiduciary who has to provide a standard of care which often precludes them from exposing your capital to the risks inherent in trading in assets that fall under the “alternatives” label.

But the higher the risk, the higher the reward can be.  That’s why people pay steeper administrative and custodial costs to hold self-directed IRAs. They are okay with the higher fees if they can invest in alternatives that might yield a higher return. It’s as if these account holders pay people a premium to not give them any advice.

Off the menu

The market value of the worldwide stock market is around $111 trillion, and that of the bond market is $119 trillion. These numbers, staggering as they may be, are dwarfed by the value of commodities futures alone. We discussed these recently and, although there is a compelling investment case to be made, you’d have to choose between investing them in a taxable account where paying capital gains  is just part of the calculus,  or owning them  in  a self-directed IRA with added internal expenses and costs.

The same is true with  investing in private equity. In most cases, you need to qualify as an accredited investor, which means meeting certain wealth or income thresholds. Although venture capital is treated as an entirely separate category, that’s more a reflection of the investors involved, not the law. VC comes in at earlier stages in a company’s development than PE, but there’s not a lot of difference in how the Securities and Exchange Commission views these two. For that matter, hedge funds fall under the same broad category.

And there’s real estate. Whether you like to roll up your sleeves and flip houses or  you prefer to be a limited partner of a firm that develops or manages apartment buildings, real estate is generally seen as a solid investment. But it’s difficult to own real estate  in your standard-issue retirement plan.

While you don’t have to be an accredited investor to run a fix-and-flip operation, you probably will need to be in order to invest in alternatives via  limited liability partnerships (LLPs). And while just about  anybody can invest in cryptocurrency, it’s highly unlikely that you have a way to gain access to that asset class in  your employee-sponsored 401(k) plan.

Simple solution

Let’s start with real estate. You can’t get exposure to  equity participation in a commercial real estate venture in your typical retirement plan, but you can own  units of real estate investment trusts (REITs). As long as a REIT is listed on an exchange and trades like a stock, you can own it  in most  qualified retirement accounts.

And while neither commodities futures nor their underlying assets fit in such a plan, there’s probably a stock that provides you with exposure to the same economic forces. In December we illustrated how that applies to rare earth metals, but the logic applies more broadly. Don’t like how the surge in oil prices is hitting you when you fill up the tank? It’s only human to grumble about it, but the markets provide you with a way to fight back:  buy some shares of ExxonMobil.

Let’s expand that a little further. If there’s an alternative asset you’d like to put in your retirement account if  you could, someone on Wall Street has likely figured out a way to invest in that asset class via  an exchange-traded fund (ETF). For example, you can’t own cryptocurrencies in your nest egg, but you can own  ETFs with exposure to  crypto. At root, ETFs are  often nothing more than index trackers and  there’s virtually no limit to what indices they can track.

While it’s true  that you can’t use your qualified retirement funds to speculate in private equity, the market has found a way to meet you halfway. Special purpose acquisition companies, or SPACs, are shell companies that trade – thinly – on stock exchanges as they hunt for private companies to buy. Sometimes called “blank check companies,” SPACs structure their acquisition as mergers, so the formerly private target suddenly “becomes” a publicly traded company. This helps the start-up bypass the time of going through multiple rounds of private equity raises as well as the expense and complexity of an initial public offering. The advantage for you as a retirement account holder is that SPAC shares are traded on public exchanges, so there’s no regulatory difference between them and the shares of Home Depot. SPACs have been around for a long time and historically have been considered kind of dodgy. However, over  the past few  years, though, they have become more widely embraced  Crain’s reports that four of 2021’s 30 biggest M&A deals were made by SPACs.

At the close

Whatever it is you want to invest in that your plan doesn’t support, there might very well be a REIT, an ETF, a SPAC or maybe just a plain-vanilla share of stock that gives you the same exposure. There might be less upside, but there would be less downside too, making it the kind of investment ERISA had in mind for retirement planning.

If you need advice on finding specific assets that match both the regulators’ hurdles and your own investment goals, consider talking with a trusted financial advisor.

-Chris

Chris Lott, CFP®, CPA

Financial Partner and Wealth Advisor

Chris Lott, CFP®, CPA is a Managing Partner at Smith Anglin Financial, and is a member of the firm’s Investment Committee. He regularly meets with prospective clients, counsels existing clients, leads investment portfolio analysis and develops materials for communicating with the firm’s clientele and target markets.