Putting Headlines into Perspective
It’s hard not to feel distressed, concerned, and maybe even depressed by recent headlines:
Sept 20th: Bloomberg: “Fed Signals Higher-for-Longer Rates”
Oct 4th NYT front page: “McCarthy Is Ousted as Speaker, Leaving House in Chaos”
Oct 7th, NYT front page: ‘We are at War’, Netyanyahu says after Hamas Attacks Israel
We can’t help the strong mix of negative emotions the headlines create from many different perspectives. As humans, we feel empathy and grief given the very real suffering caused by the wars in Ukraine and now Israel and Gaza. As citizens, regardless of which side of the aisle our political views sit, we feel sad to see the House of Representatives without a leader for the first time in history. And as investors, if we only read the headlines and the underlying articles in our major news outlets, we feel panicked because it seems as if there’s never a good time to invest given all the uncertainty.
As your wealth managers, we understand these emotions and do our best to stay laser focused not on the headlines, but on the macroeconomic conditions and evidence-based options we have as investors and investment professionals.
Today, we are going to offer our perspective on today’s higher interest rate environment.
First, let’s not forget that higher interest rates benefit savers. It’s nice to see multiple savings account options earning over 4%¹ and the monthly accrued interest now providing meaningful income.
The impact of higher interest rates in other parts of our lives is minimal unless we need to refinance a mortgage or purchase a home or automobile that requires a loan. While it may be disappointing to wait for a new car or home, these delays are unlikely to have a material, long-term impact on our financial plans. In addition, waiting may be easier knowing that for the first time in a long time, the Federal Reserve now has a greater ability to lower interest rates if (and when) needed to stimulate the economy, hopefully mitigating the next economic slowdown or recession.
As equity investors, we are once again reminded that the stock market is a high octane roller coaster that can increase quickly (as we saw in the first half of this year) and decrease just as quickly (as evidenced by the S&P 500 losing 4.8% and the NASDAQ ending up down 5.8% in September)². The nerve-racking uncertainty related to the short term moves of the stock market is one of the reasons that stocks historically provide a return of high single to low double digits, and low risk investments like Treasury Bills historically return only low single digits³.
As bond investors, the impact of higher rates is more nuanced. Once again, we are facing a rare period with the Bloomberg U.S. Aggregate Bond Index down -1.2% year-to-date through September 30th. Fortunately, our primary taxable bond managers are doing slightly better than the broad benchmark with Dodge & Cox Income Fund at 0.34% and JP Morgan Core Bond Fund at -0.51%, both year-to-date through September 30th. Despite the lack of year-to-date returns generated, it is comforting to see the relative stability of bonds this year versus the historic negative drawdowns of last year.
Further, the good news is that the current yield of 5.5% as of October 6th implies that for every $100,000 invested in the broad U.S. core investment grade bond market, you would expect to receive $5,500 in interest payments over the next 12 months, much higher than we have seen in years. The bad news is that these higher yields are pushing down the prices of the bonds we already own, so if (and only if) we decided to sell our bond investments we would incur a loss. Long-term bond investors who don’t sell bonds in this environment will get their principal back when the bonds mature, assuming no defaults, so those negative year-to-date numbers are only paper losses, not realized losses. Prices will naturally move back toward par as the bonds near their maturity dates, and/or if interest rates reverse course and fall.
These market observations are current examples of why we spend so much time understanding our clients’ short and long-term financial needs, wants, and wishes. Armed with that understanding, we can develop durable, lifelong financial plans and corresponding investment portfolios designed to fuel those plans…not over the course of days, weeks, or even years, but rather over decades.
We hope you and your family are well and are not directly impacted by recent geopolitical events, and you’re able to find time to decompress. We also hope you take comfort knowing that we are working to ensure every aspect of your financial plan and portfolio is well-positioned for today and the future.
As always, feel free to reach out with any questions or comments.
——
1. Motley Fool list of FDIC insured savings accounts yielding over 4%
2. YTD Market returns for S&P 500 and NASDAQ published Oct 5th, 2023 on Nasdaq.com
3. Dimensional Fund Advisors. Stocks represented by S&P 500 Index Treasury Bills represented by One-Month U.S. Treasury Bills.
Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income.
Client portfolios may or may not hold the bond funds listed above for the referenced time period. Actual client performance may be lower or higher than the performance data quoted. Performance data provided by fund manager. Returns less than one year are not annualized. Consult your WWP performance report or WWP Client Portal for more detail.
Waypoint Wealth Partners (WWP) is a Registered Investment Adviser with the U.S. Securities & Exchange Commission. Registration does not imply a certain level of skill or training. The information provided is for informational purposes only and should not be construed as investment advice or a determination that a particular product or service is suitable for any individual. This information should not be relied upon in making an investment decision. The information represents the views of WWP at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein. In addition, there can be no guarantee that any projection, forecast or opinion in this material will be realized. Any statement nonfactual in nature constitutes only current opinion which is subject to change. Any reference to a security listed herein does not constitute a recommendation to buy, sell or hold such security. Past performance is no guarantee of future results. Any tax and estate planning information offered by WWP is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.