How Would You Like that Cooked?
The Federal Reserve’s move to increase the Fed Funds Rate (FFR) by another 75 basis points to an upper bound of 3.25% was widely anticipated and what the chef (or market) suggested. Their quarterly summary of economic projections is what moved markets, due to the sharp increase in what the FOMC expects its policy rate to be at the end of this year and next year.
Their estimate of the FFR went from 3.4% to 4.4% for the end of 2022, and from 3.9% to 4.6% for the end of 2023. The last time it was above 4% was December 2007. Below is a summary of how the other projections changed.
Given that markets had only priced in a rate of roughly 4.2% by year-end, the immediate movement in equities and bonds after this decision was negative in response to a more hawkish stance. The inversion between 2-Yr and 10-Yr Treasurys deepened by 10 basis points to 52bps. As Chairman Powell spoke, markets flattened out upon hearing his continued commitment to containing inflation and creating an environment that allows for a sustainably healthy labor market, only to whipsaw back down by the end of the trading day and finish notably in the red.
If the Fed had previously ordered their economy cooked “medium,” this meeting’s projections moved their order to “medium well.” The primary fear of many investors remains that monetary policy will overshoot and push us into a painful recession at some point in the next 12 months.
No Knife on the Table
The statements that continued to be reiterated by Chairman Powell were, “strongly committed to bringing inflation back to our 2% goal” and “we think we’ll need to bring our funds rate to a restrictive level, and to keep it there for some time.” With headline CPI still sitting at 8.3% and headline PCE at 6.3%, it’s clear that the 2% target is quite a ways in the distance. As such, at this point, rate cuts seem to me a fantastical idea that is just as far off.
Until inflation falls notably, equity markets could continue to suffer from volatile moves on each macro data point as investors attempt to discern the likelihood — and possible severity of — a looming recession.
Chew Slowly
I’ve taken some flack lately for my commentary being too risk averse. But in an environment where further hikes are on the menu, inflation is still the centerpiece, and no one knows if the labor market will make it through dinner, a lower-than-usual risk tolerance in the short-term is an important consideration.
But that does not mean keep it all in cash. It means choose carefully and keep in mind the hiking cycle isn’t over yet. Until we have a clearer idea of where the FFR will top out, I still view the classic growth sectors of Tech and Consumer Discretionary as too expensive at 20.0x and 24.5x forward P/E, respectively. The growth that can be found in Communication Services (14.3x) and Health Care (15.5x) is more attractive at this juncture, in my opinion.
I also continue to find the Treasury market attractive at these levels, particularly shorter-term Treasurys with the 2-Yr yield hovering around 4% and roughly 50bps above the 10-Yr yield. If this Fed meeting didn’t cause a sustained rise in either yield (thus a sustained fall in prices), I have a hard time envisioning something that will, unless we lose control of inflation expectations.
The fight against inflation is still on, and the outlook on the economy is still muddy. I don’t believe equities will find a smoother path upward until inflation comes down, whether because of tighter policy or because of a recession that restarts the business cycle. In either event, the road for markets remains an obstacle course.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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5 investment tips every retiree should know
A lot of personal finance advice is about saving for retirement. But the need for saving and investing doesn’t stop once you’re done working; seniors also need to maintain a sound investment strategy during retirement.
Retirees face several challenges that make investing after 65 necessary, including maintaining safe income streams, outpacing inflation, and avoiding the risk of running out of money. Here are some tips seniors may consider as they choose the right investment path during retirement.
Related: Typical Retirement Expenses to Prepare For
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Once in retirement, seniors likely don’t have an income stream from a steady paycheck. Instead, retirees utilize a mix of sources to pay the bills, such as Social Security, withdrawals from retirement and savings accounts, and perhaps passive sources of income such as rental properties. This change, going from relying on a regular salary to relying on savings and investments to fund a particular lifestyle, can be daunting.
Retirees should first understand where their income is coming from and how much is coming in to help navigate this financial change. This initial step can help establish a budget that allows the retirees to comfortably cover expenses and map out discretionary spending or new investments in their golden years.
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Retirees must consider time horizon and risk in post-retirement investment plans. Time horizon is the amount of time an individual has to invest before reaching a financial goal or needing the investment earnings for living expenses.
Time horizon significantly affects risk tolerance, which is the balance an individual is willing to strike between risk and reward. Generally speaking, seniors with a time horizon of a decade or more may invest in riskier assets, such as stocks, because they have time to ride out any short-term downturns in the market. Individuals with a short time horizon of just a few years may stick to more conservative investments, such as bonds, where they can benefit from capital preservation and interest income.
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Diversification involves spreading out investment across different asset classes, such as stocks, bonds, real estate, and cash. Diversification also involves spreading investments out among factors such as sector, size, and geography within each asset class.
It is important to consider diversification when investing after retirement. Diversification helps investors protect their portfolios from the risk and volatility unique to a specific type of investment. Retirees do not want to concentrate a portfolio with any one asset, which may increase volatility during a period when they want a low risk tolerance.
Recommended: Why Portfolio Diversification Matters
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A retiree’s financial goals, risk tolerance, and time horizon generally affect the desired asset allocation in an investment portfolio. However, those initial goals and risk considerations can change during a retiree’s golden years. Additionally, the market is constantly in flux, shifting the proportions of assets a person holds. It may make sense to rebalance the assets inside a portfolio regularly.
Rebalancing a portfolio can be thought of like the routine upkeep of your investments. For example, if a portfolio has an asset allocation of 70% bonds and 30% stocks and the stocks do well during a year, they might make up a higher percentage of a portfolio than planned.
By the end of the year, the asset allocation may be 65% bonds and 35% stocks. The investor may want to rebalance by selling stock and buying more conservative assets, such as bonds, to ensure the portfolio’s asset allocation is in line with their goals. Alternatively, they may use other income to make new bond investments.
Recommended: How Often Should You Rebalance Your Portfolio?
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Retirees living on a fixed income may be negatively affected by rising inflation. As prices increase, the fixed income that an individual relies on will be worth less the following year. For example, if an individual receives $1,000 a month in a fixed income and inflation rises by a 4% annual rate, then that $1,000 monthly income will be worth $960 in today’s money.
Investments that pay out a fixed interest rate, such as bonds, are most vulnerable to inflation risk as inflation may outpace the earned interest rate.
Investors can help protect themselves against inflation risk by owning assets that tend to outpace inflation, such as stocks, real estate, or inflation-protected securities.
Recommended: How Does Inflation Affect Retirement?
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Retirees have a lot of choices when it comes to making new investments. But their financial goals, age, and risk tolerance can impact which investments they choose to make. Here are a few investments for seniors in retirement with those factors in mind.
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Cash is the most stable way to hold money, and it is a necessary part of a retiree’s financial portfolio. Keeping cash on hand can help cover necessities like housing, utilities, food, and clothes.
Retirees can put a portion of their cash in a money market account or a high-yield savings account to earn interest while having easy access to their cash. However, the interest paid out in typical savings or checking accounts tends to be very low and may not beat the inflation rate. That means the money in these accounts may slowly lose its value over time.
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Bonds generally don’t offer the same potential for high returns as stocks and other assets, but they have advantages for investing after retirement. Bonds typically pay interest regularly, such as twice a year, which provides investors with a predictable income desired in retirement. Also, if investors hold a bond to maturity, they get back their entire principal, which can help preserve their savings while investing.
Various types of bonds help investors preserve capital and realize interest income during retirement, including relatively safe U.S. Treasuries. Additionally, Treasury-Inflation Protected Securities (TIPS) are bonds that hedge against inflation, which can be helpful for retirees worried about rising prices.
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Stocks are considered a risky investment; they tend to be more volatile than more conservative assets like bonds or certificates of deposit. Though investing in stocks can lead to significant returns, it also means there is the potential for big losses that many retirees may not be able to stomach. However, retirees shouldn’t write off investing in stocks because there is a potential for losses. There is value in investing in stocks for seniors.
Stock investments may help ensure a portfolio experiences capital gains that outpace inflation and have enough income in the later decades of their retirement. It may not make sense for older investors to chase returns from higher risk stocks like tech start-ups. Instead, retirees may look for proven companies whose stocks offer steady growth. Retirees may consider investing in companies that provide stable dividend payouts that generate a regular income source.
Recommended: Living off Dividend Income: Here’s What You Need to Know
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Certificates of deposit, otherwise known as CDs, are low-risk investments that may offer higher interest rates than typical savings accounts. Investors put their money in a CD and choose a term, or length of time, that the bank will hold their money. The term length is generally anywhere from one month to 20 years, and during this period, the investor can’t touch the money until the term is up. Once the term is over, the investor gets the principal back, plus interest. Typically, the longer the investor’s money is in the account, the more interest the bank will pay.
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Annuities can provide retirees with a regular income, bolster the gains from other investments, and supplement savings. In short, an annuity is a contract with an insurance company. The buyer pays into the annuity for a certain number of years, and the insurance company pays back the money in monthly payments. Essentially, an individual is paying the insurance company to take on the risk of outliving their retirement savings.
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Investing for retirement should begin as soon as possible, ideally through a tax-advantaged retirement account. But the need for a sound investing strategy doesn’t stop once you hit retirement. You need to ensure that your savings and investments are working for you throughout your golden years.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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