When Hefren-Tillotson financial advisors meet with clients it is usually to review their portfolios, discuss changes, offer recommendations, explain recent equity and fixed income movements and other important things. It might be routine, but it is certainly necessary.
Not often do they discuss the effects of an unprecedented ongoing global pandemic, military conflict, forced takeover, or a president fleeing his country and its people. However, in the new age anything is possible.
Anything that affects us globally affects the markets, because markets are forward-looking and are always asking, “What will happen if this happens?”
There Are Good, Bad and Worse Days
Generally speaking, world events and disruptions don’t impact stocks too much (treading carefully here), but if and when they do, thankfully, it is short-lived.
Back in June, the World Bank estimated the global economy was expected to expand 5.6% in 2021, the fastest post-recession pace in 80 years, largely on strong rebounds from a few major economies.
However, many emerging market and developing economies struggle with the pandemic and its aftermath, the World Bank said in its June 2021 Global Economic Prospects. And so, despite the recovery, global output was modified to about 2% below projections by the end of this year.
All three major stock indexes finished the third week of August lower, closing the week in red. Typically, August trading flows bring volatility with mostly lower volume, but this time it was the fear of the Federal Reserve pulling back its stimulus.
Sales from shopping and restaurants nationally dropped 1.1 percent in July from the previous month, according to the U.S. Department of Commerce’s latest report. Foot traffic for retail, restaurants and entertainment increased 52 percent since January 2021, but it is down three percent from July, according to marketing firm Zenreach.
Investors sold equities and commodities and bought bonds on fears the move by the Federal Reserve could topple a global economy. Minutes from the Fed’s July meeting disclosed the central bank is willing to start reducing its monthly asset purchases this year.
What Does This All Mean to Retail Investors?
The Federal Reserve has dual mandates to promote maximum employment and price stability. One of the ways they do this is through adjusting short-term interest rates. Federal Reserve officials have said repeatedly that tapering—gradually stopping asset purchases when there is no predefined end date or amount—will happen first, with interest rate hikes unlikely until the process has been completed and the central bank isn’t growing its balance sheet anymore. The result is the FOMC voted to keep short-term rates anchored near zero, making a rate hike at least a year away.
Short-term interest rates are rates at which short-term borrowing is affected between financial institutions, or the rate at which short-term government paper is issued or traded in the market.
An Inverse Effect
The inverse effect is a typical scenario with bonds and interest rates. Savvy investors understand and accept that a diversified investment portfolio typically includes bond investments and inverse movement. To illustrate, please pardon the overuse of italics.
Short-term bonds can rise in value when interest rates fall. If interest rates go below what a bond pays, investors will be willing to pay more for it. The caveat is, however, any new bonds they buy will pay a lower interest rate.
Traditionally, when interest rates are lower, unemployment rises and companies lay off expensive workers and hire contractors, temporary or part-time workers at lower prices.
But when wages decline, people can’t pay for things and prices on goods and services are forced down, leading to added unemployment and lower wages.
With lower borrowing costs, companies can grow and expand more quickly leading to greater profits.
So, the Fed adjusts interest rates to affect demand for goods and services, and low interest rates mean more spending money in consumers’ pockets. That also means they may be willing to make larger purchases and will borrow more, which spurs demand for household goods.
This is an added benefit to financial institutions because banks are able to lend more. But lowering rates also makes borrowing money cheaper and usually encourages consumers and businesses to spend more. Investing, too, can boost asset prices.
Who Will Benefit?
Home sellers benefit from selling at higher prices. In some cases, appraisals go out the window. Bidding wars occur between interested buyers. Homebuyers have secured FHA, USDA, VA, Conventional and Jumbo Loans advertised at 2 percent fixed for 15 to 30 years. For those looking for a second home (if they can find one), this could bring huge savings.
But as they say in advertisements, “This won’t last long.” Basically, get it while you can.
And if you need help along the way, contact us at Hefren-Tillotson. We’ll be glad to help.