Understanding the Fed’s Pause on Rate Hikes

June 29, 2023

Remain vigilant as we might see more rate hikes later this summer

The decision by the Federal Reserve to pause its upward trajectory of the federal funds rate – after 10 straight hikes over the past 14 months – has significant implications for investors. As the central bank of the United States, the Fed’s monetary policy decisions have a profound impact on financial markets and the investment landscape.

Let’s explore what this pause means for investors and explore potential strategies to navigate this new environment.

Understanding the Pause

To grasp the implications of the Fed’s pause, it is crucial to understand the underlying reasons for this shift in policy. The Federal Reserve’s primary mandate is to maintain price stability and support maximum employment. The decision to halt rate hikes suggests that the Fed believes inflationary pressures may be lessening or that the economy requires more time to fully recover. By pausing rate hikes, the central bank aims to provide ongoing support to economic growth.

Bond and Fixed-Income Investments

The Fed’s pause on rate hikes has immediate implications for bond and fixed-income investors. Typically, rising interest rates lead to declining bond prices. However, with the Fed indicating a pause in rate hikes, bond prices may stabilize or even experience modest gains. This is particularly relevant for long-term bondholders who were concerned about potential losses in a rising rate environment.

Nevertheless, investors should remain vigilant. While the pause in rate hikes may provide some relief, it is essential to monitor inflationary trends and the Federal Reserve’s future actions. Unexpected shifts in inflation expectations or the resumption of rate hikes could still impact fixed-income investments.

Equity Markets and Investment Strategies

The Fed’s pause on rate hikes can also have a significant impact on equity markets. Historically, low interest rates have been supportive of stock prices, as they reduce borrowing costs for businesses and increase the present value of future earnings. Investors should consider the potential for continued strength in equity markets as long as the pause in rate hikes persists.

However, it is crucial to exercise caution and avoid complacency. Market conditions can change rapidly, and investors should remain attentive to both global economic developments and the possibility of future rate hikes. Adopting a diversified investment strategy that balances exposure across sectors and geographies can help mitigate risks associated with potential market volatility.

Related Report: Charles Schwab’s Mid-Year Outlook

Sector Rotation and Asset Allocation

The pause in rate hikes offers an opportunity for investors to reassess their sector allocations and asset mix.

Certain sectors, such as utilities and real estate, tend to perform well in a low-interest-rate environment.

These sectors often exhibit stable cash flows and attractive dividend yields, making them appealing to income-focused investors.

Conversely, sectors like financials and banking may face challenges due to narrower interest rate spreads. Investors may consider rotating their investments into sectors that could benefit from the pause in rate hikes, while also maintaining a long-term perspective and keeping diversification in mind.

International Considerations

The Fed’s decision to pause rate hikes also has implications beyond the United States. Lower interest rates in the U.S. can lead to a weaker U.S. dollar, potentially benefiting international investments and exporters. Investors should consider the potential impact on currency valuations and diversify their portfolios by allocating a portion of their investments to international markets.

What Investors Should Do

The Federal Reserve’s pause on rate hikes represents a significant development for investors. The decision suggests that the central bank is carefully monitoring economic conditions and adjusting its policies accordingly. Bond and fixed-income investors may find some respite, while equity investors should remain attentive to potential shifts in market dynamics.

To navigate this evolving landscape, investors should adopt a diversified approach, reassess sector allocations, and consider the potential benefits of international investments.

Staying informed, monitoring economic indicators, and seeking professional advice can help investors make well-informed decisions in this environment of paused rate hikes. Even if it only lasts for a month.

New Data from the NFIB Small Business Optimism Index

June 14, 2023

Small Businesses Feeling More Optimistic But This is the 17^th Month in a Row Below the 49-Year Average

There are over 30 million small businesses in the United States, according to the Small Business Administration and small businesses comprise about 99% of all U.S. businesses. Further, about half of all Americans – 48% – are employed by small businesses, meaning almost 60 million employees in the U.S. work for a smaller company.

Small Businesses Feeling More Optimistic

On June 13^th, “the NFIB Small Business Optimism Index increased 0.4 points in May to 89.4, which is the 17^th consecutive month below the 49-year average of 98. The last time the Index was at or above the average was in December 2021. Small business owners expecting better business conditions over the next six months declined one point from April to a net negative 50%. Twenty-five percent of owners reported that inflation was their single most important problem in operating their business, up two points from last month and followed by labor quality at 24%.

Key findings include:

• Forty-four percent of owners reported job openings that were hard to fill, down one point from April and remaining historically very high.
• The net percent of owners raising average selling prices decreased one point to a net 32% (seasonally adjusted), still an inflationary level but trending down.
• The net percent of owners who expect real sales to be higher deteriorated two points from April to a net negative 21%.”

Job Openings Still Hard to Fill

Further, as reported in the NFIB’s monthly jobs report:

• Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 19% planning to create new jobs in the next three months.

• Overall, 63% of owners reported hiring or trying to hire in May, up three points from April.
• Of those hiring or trying to hire, 89% of owners reported few or no qualified applicants for their open positions.

In addition:

• A net 41% of owners reported raising compensation, up one point from April.
• A net 22% plan to raise compensation in the next three months, up one point.
• Ten percent of owners cited labor costs as their top business problem.
• 24% said that labor quality was their top business problem.

How Inflation Impacts Wealth Management and Investment Strategies

March 29, 2023

Navigating High Inflationary Periods and Protecting Your Wealth Over Time

Inflation is an economic concept that describes the increase in the cost of goods and services over time. As inflation rises, the purchasing power of your money decreases – which you may feel in your daily life. However, it can also have a significant impact on your long-term wealth management and investment strategies. In this article, we’ll explore how inflation impacts wealth management and investment strategies and provide tips on how to navigate inflationary periods.

Erosion of the Value of Money

Inflation can have a significant impact on the value of your money. As prices rise, the purchasing power of your money decreases, which means you can buy fewer goods and services with the same amount of money. This erosion of value can have a significant impact on your wealth management and investment strategies, regardless of your stage in life. If you’re still working and building a nest egg, it may mean you’re able to save or invest less than you can in periods of lower inflation. If you’re already retired, it may mean you need to adjust your withdrawal strategy to pay the bills, which means your nest egg may not last as long as you had planned.

Investment Returns May Not Keep Pace

Inflation can also have an impact on investment returns and require you to take a closer look at your portfolio. While investments can generate returns over time, those returns may not keep pace with inflation. For example, if inflation is 3% per year, and your investment returns are only 2%, your purchasing power will still decrease over time. If you find yourself in this situation, you’ll want to consider seeking out investments that provide returns that are higher than the rate of inflation in order to better protect your wealth.

Diversification Becomes Even More Critical

Diversification is always a smart option, but it becomes a key strategy for wealth management and investment in inflationary periods. By diversifying your investments across different asset classes, you can spread your risk and reduce the impact of inflation on your overall portfolio. For example, investing in stocks, bonds, and real estate can provide a more balanced portfolio that is less vulnerable than a portfolio that is more heavily weighted toward inflationary shocks.

You Might Consider Inflation-Protected Securities

Inflation-protected securities (IPS) are investments that are specifically designed to protect against inflation. These securities are typically linked to the Consumer Price Index (CPI), which measures inflation, and they provide returns that are adjusted for inflation. IPS can provide a hedge against inflationary periods and can be a valuable tool for wealth management in times of high inflation.

Mitigate Impact with Tax-Efficient Investment Strategies

If you’re not already practicing tax-efficient investment strategies, you’ll want to begin for a number of reasons – not the least of which is that doing so can help mitigate the impact of inflation on your wealth. By investing in tax-efficient vehicles, such as 401(k) plans, IRAs, and municipal bonds, you can reduce the amount of taxes you pay on your investment returns, which can help boost your overall returns and protect your wealth against inflation over the long term.

Would You Like to Learn More About How Inflation Impacts Wealth Management and Investing?

Inflation can have a significant impact on wealth management and investment strategies, and on your day-to-day life, too. By understanding how inflation erodes the value of money, considering diversification and investing in inflation-protected securities, and taking advantage of tax-efficient investment strategies, you can take steps that may help protect your wealth and stay ahead of inflationary periods. With careful planning and a diversified portfolio, you can better navigate inflationary periods and continue building wealth over time.

If you’d like to discuss more about how inflation impacts wealth management, contact Lane Hipple Wealth Management Group at our Moorestown, NJ office by calling 856-638-1855, emailing info@lanehipple.com, or to schedule a complimentary discovery call, use this link to find a convenient time.

Illuminated Advisors is the original creator of the content shared herein. I have been granted a license in perpetuity to publish this article on my website’s blog and share its contents on social media platforms. I have no right to distribute the articles, or any other content provided to me, or my Firm, by Illuminated Advisors in a printed or otherwise non-digital format. I am not permitted to use the content provided to me or my firm by Illuminated Advisors in videos, audio publications, or in books of any kind.

Markets Mixed as Growth and Tech Names Jump on Hopes That the Fed Might Have Reached an Inflection Point on Hiking Rates

March 17, 2023

• This week was dominated by banking worries that started with the collapse of Silicon Valley Bank last week and spread to Signature Bank of New York and a few others this week
  
  
• But before markets opened on Monday, Wall Street learned through a joint statement from the Federal Reserve, Treasury, and the FDIC that all depositors at SVB and Signature Bank would be able to access deposits on Monday, despite being taken over by regulators
  
  
• When Friday’s final Wall Street bell rung, equity returns were mixed, as the small-cap Russell 2000 lost 2.6%, pushing it into the red for the year (YTD: -2.0%) and the mega-cap DJIA lost 0.1%, pushing it further into the red for the year (YTD: -3.9%)
  
  
• The tech-heavy NASDAQ, on the other hand, leapt an astonishing 4.4%, as investors hoped that the Fed’s rate hiking might slow down or be over for the year
  
  
• The large-cap S&P 500 inched up 1.4% and is positive for the year (YTD: +2.0%)
  
  
• Of the 11 S&P 500 sectors, 6 were positive, with the growth sectors, especially Communication Services (+6.9%) and Information Technology (+5.7%), outpacing the defensive sectors like Utilities (+3.9%) and Consumer staples (+1.3%)
  
  
• The 2-year Treasury yield sank 77 basis points to 3.82% and the 10-year Treasury note yield fell 29 basis points to 3.40%
  
  
• Oil prices dropped 13.5% this week to $66.33/barrel, the lowest level since December 2021
  

Weekly Market Update – March 17, 2023

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD.
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results

Markets Mixed as Bank-Failure-Worries Ease

It was another volatile week for equity markets around the world, as pressures mounted on the banking sector as concerns grew after the failures of Silicon Valley Bank and Signature Bank and worries at First Republic Bank and Credit Suisse.

And while pundits were quick to call attention to the big bank failures of 2008/2009, this week was different as governments (including the Fed, the Federal Deposit Insurance Corporation, and the Treasury Department) and other well-capitalized banks stepped in quickly to put worries at ease.

Then as bond yields dropped swiftly, equities rebounded, giving investors a good case of whiplash. When the week ended, the major U.S. equity indices finished mixed, as the current banking worries might ultimately end up as an inflection point where the Fed slows down or even pauses future rate hikes this year.

Not surprisingly, the 11 S&P 500 sectors varied markedly, with 5 of the 11 ending the week in the red. Specifically, Communication Services (+6.9%) and Information Technology (+5.7%) made big weekly jumps and Financials (-4.9%) and Energy (-6.9%) struggled with big losses. The range in sector returns was further underscored as Large Growth outperformed Large Value by almost 6%.

While the bank failures were unpleasant, glass-half-full investors were hopeful that the Fed might adjust its monetary policy and not raise rates by as much. By the end of the week, the fed fund futures markets were pricing in zero likelihood of a 50-basis-point hike versus a 40% chance just one week ago and an almost 40% chance of no rate hike at the Fed’s upcoming meeting on March 21^st.

While it seemed everyone was focused on the latest banking news, there was a lot of economic data this week too, including:

• The Consumer Price Index was was up 0.4% month-over-month in February, and up 6.0% year-over-year, which was the smallest 12-month increase since September 2021
  
  
• Core CPI, which excludes food and energy, was up 0.5% month-over-month and up 5.5% year-over-year, which was the smallest 12-month increase since December 2021
  
  
• The February NFIB Small Business Optimism Index came in at 90.9
  
  
• Weekly MBA Mortgage Applications Index were up 6.5%
  
  
• February Retail Sales were down 0.4%
  
  
• February Retail Sales ex-autos were down 0.1%
  
  
• February PPI was down 0.1%
  
  
• February Core PPI was flat at 0.0%
  
  
• January Business Inventories were down 0.1%
  
  
• Weekly Initial Claims came in at 192,000
  
  
• February Import Prices were down 0.1%
  
  
• February Export Prices were up 0.2%
  
  
• Leading Indicators fell 0.3% in February
  
  
• The preliminary University of Michigan Consumer Sentiment Index for March dropped to 63.4
  

Consumer Price Index Records Smaller Increase, But Food Index is Up 9.5% Over the Last Year

On Tuesday, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers rose 0.4% in February, after increasing 0.5% in January. Over the last 12 months, the all items index increased 6.0% before seasonal adjustment.

Specifically:

• The index for shelter was the largest contributor to the monthly all items increase, accounting for over 70% of the increase, with the indexes for food, recreation, and household furnishings and operations also contributing.
  
  
• The food index increased 0.4% over the month with the food at home index rising 0.3%.
  
  
• The energy index decreased 0.6% over the month as the natural gas and fuel oil indexes both declined.
  
  

• Categories which increased in February include shelter, recreation, household furnishings and operations, and airline
  fares.
  
  
• The index for used cars and trucks and the index for medical care were among those that decreased over the month.
  

Inflation Over the Past 12-Month

The all items index increased 6.0% for the 12 months ending February; this was the smallest 12-month increase since the period ending September 2021.

• The all items less food and energy index rose 5.5% over the last 12 months, its smallest 12-month increase since December 2021.
  
  
• The energy index increased 5.2% for the 12 months ending February.
  
  
• The food index increased 9.5% over the last year.
  

Food Index

• The food index increased 0.4% in February, and the food at home index rose 0.3% over the month. Five of the six major grocery store food group indexes increased over the month. The index for nonalcoholic beverages increased 1.0% in February, after a 0.4% increase the previous month. The indexes for other food at home and for cereals and bakery products each rose 0.3% over the month. The index for fruits and vegetables increased 0.2% in February, and the index for dairy and related products rose 0.1%.
  
  
• In contrast, the meats, poultry, fish, and eggs index fell 0.1 percent over the month, the first decrease in that index since December 2021. The index for eggs fell 6.7% in February following sharp increases in recent months.
  

Nearly Half of Small Businesses Have Job Openings They Can’t Fill

Early in the week, the National Federation of Independent Businesses reported that 47% of small business owners reported job openings they could not fill in the current period.

Specifically, “[t]he percent of small business owners reporting labor quality as their top small business operating problem remains elevated at 21%, down three points from January. Labor cost reported as the single most important problem to business owners increased two points to 12%, down one point below the highest reading of 13% reached in December 2021.

A seasonally adjusted net 17% of owners are planning to create new jobs in the next three months, down two points from January and 15 points below its record high reading of 32 reached in August 2021, showing that the trend in planned hiring is on the decline.

Sixty percent of owners reported hiring or trying to hire in January, up three points from January. Of those hiring or trying to hire, 90% of owners reported few or no qualified applicants for the positions they were trying to fill. Thirty percent of owners reported few qualified applicants for their open positions.

Further:

• 46% of owners reported raising compensation, unchanged from last month.
  
  
• 23% plan to raise compensation in the next three months, up one point from January.
  
  
• 38% of owners have job openings for skilled workers.
  
  
• 19% have openings for unskilled labor.
  

Sources:  bls.gov;  nfib.com;  msci.com; fidelity.com; nasdaq.com;  wsj.com;  morningstar.com

Inflation Was Up 0.5% in January and 6.4% Over the Past 12-Months

February 15, 2023

On Tuesday, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.5% in January on a seasonally adjusted basis, after increasing 0.1% in December. Over the last 12 months, the all items index increased 6.4% before seasonal adjustment.

Specifically:

• The index for shelter was by far the largest contributor to the monthly all items increase, accounting for nearly half of the monthly all items increase, with the indexes for food, gasoline, and natural gas also contributing.
• The food index increased 0.5% over the month with the food at home index rising 0.4%.
• The energy index increased 2.0% over the month as all major energy component indexes rose over the month.

The index for all items less food and energy rose 0.4% in January. Categories which increased in January include the shelter, motor vehicle insurance, recreation, apparel, and household furnishings and operations indexes. The indexes for used cars and trucks, medical care, and airline fares were among those that decreased over the month.

The all items index increased 6.4% for the 12 months ending January; this was the smallest 12-month increase since the period ending October 2021. The all items less food and energy index rose 5.6% over the last 12 months, its smallest 12-month increase since December 2021. The energy index increased 8.7% for the 12 months ending January, and the food index increased 10.1%.

Inflation Over the Past 20-Years

Sources: bls.gov