Federal Reserve Testimony Suggests Higher Rates Are Likely

The Fed’s Next Major Move

The Fed’s Next Major Move

What We’re Watching This Week

Please note: This update was prepared on Thursday, March 9, 2023, prior to the market’s close.

  • Federal Reserve testimony. Fed Chair Jerome Powell’s testimony on Capitol Hill this week included a warning of sorts to investors: If warranted by upbeat economic conditions, the central bank may hike interest rates more than anticipated. Prior to Powell’s appearance, a 0.25% bump was expected at the next Fed meeting, but now investors are bracing for a 0.50% hike and more increases to come later in the year. That may sound minor, but even a modest increase from the current 4.50%–4.75% range could affect businesses’ and consumers’ ability to borrow affordably, which could negatively impact economic growth.
  • Bank struggles? SVB Financial Group saw its shares fall by more than 60% today, as traders got wind of the aggressive measures it’s taking to shore up its balance sheet. This in turn sparked fears for the larger banking sector. While Fed policy has put pressure on banks to offer competitive yields and stem depositor outflows, the situation at SVB is unique to how it operates and does not reflect on issues for the rest of the industry. That said, our portfolio managers are keeping a close eye on the situation.
  • Jobs. Tomorrow’s unemployment report for February is just the kind of data the Fed will evaluate when deciding to raise rates by 0.25% or 0.50%. Was the eye-popping January figure—517,000 jobs created—an outlier? Another blowout month of job gains would mean investors can no longer assume that the end is in sight for Fed rate hikes. As we’ve seen of late, this is a case of good news (a resilient job market) being viewed as bad news (triggering higher interest rates).  
  • Inflation. Our analysts are looking ahead to next week’s consumer price index (CPI) reading. Is inflation still slowing? That hasn’t been the case lately for used cars—a key barometer of inflationary trends. Used vehicle prices rose 4.3% in February from the previous month, the largest jump in the month of February since 2009 and the third consecutive monthly rise. Like the jobs report, the Fed will be basing its interest-rate decisions on the details of this CPI report.

Cash Is King, but for How Long?

You’ve heard the old saying “Cash is king.” Well, to the extent that’s true today, it’s been a rags-to-riches story. Thanks to the cycle of interest-rate hikes the Federal Reserve started in 2022, cash has gotten an enormous boost in yield. A year ago, it yielded all of 0.01% (meaning it was producing $1 of income per year on a $10,000 account). Now cash has ascended from serf status to produce a far more lavish yield of 4.23% this month.

Cash yields rising
Note: Chart shows the SEC yield for the Fidelity Government Cash Reserves money market fund on a weekly basis from 2/1/22 through 3/3/23. Source: Bloomberg.

That said, there’s no guarantee cash will still be king in a year’s time. That 4.23% yield is a big improvement compared to where we’ve been, but make no mistake—cash yields can move down just as rapidly as they rise. The chart below shows how transitory the interest rate on cash can be over time.

How long will cash yields remain high?
Note: Chart shows the SEC yield for the Fidelity Government Cash Reserves money market fund on a weekly basis from 2/1/00 through 3/3/23. Source: Bloomberg.

Cash serves a vital purpose for investors and savers. Our baseline advice for clients is to maintain an emergency cash fund that can cover six months of expenses. Money market funds and savings accounts are also viable short-term parking spots for larger sums of cash earmarked for a substantial purchase, like a down payment on a house or car. 

But now that cash’s yield has become more competitive with short-term bond yields and stock dividend yields, some investors are understandably tempted to hold more of it than they have in the past. While it’s helpful to be earning extra interest on your emergency fund, we view that as an added benefit, not the goal of that account.

Talk to your wealth adviser if you have questions about how much cash you need and what kinds of alternatives make sense in the context of your financial plan. They will be able to provide answers and work with you on any adjustments to your strategy.

Married Filing Separately? The Pros and Cons

Of all the questions on your annual tax return, you’d think “filing status” would be the easiest to answer. Yet one of the most common filing questions our tax planners hear is: “Should my spouse and I file separately?”

Close to 2 million married couples choose to file their taxes separately each year, and they do so for a variety of reasons. For example, the IRS saw a significant uptick in married couples filing separately in the last three years as people sought to qualify for pandemic relief. And that’s the key: You need to be deliberate about the decision or it’s likely to cost you.

Your wealth adviser can help you think through the nuances of this decision. In the meantime, here are some of the pros and cons of filing separately:

Pros. For 2022, the standard deduction for married couples filing jointly is $25,900, while filing separately is $12,950 (for tax year 2023, deductions have been set at $27,700 and $13,850, respectively). If there’s a large discrepancy between the two spouses’ incomes, filing taxes separately can sometimes be advantageous depending on the circumstance.

For instance, it can help to maximize certain itemized deductions: If one spouse has incurred large medical expenses, dividing income into two separate returns could make a difference in terms of deductibles. It could also help a small business owner lower their reportable income for a qualified business income deduction. Or an individual may want to minimize reportable income to lower income-based student loan payments.

A second advantage of filing separately is that it severs joint liability for that tax year. If you are separated, going through a divorce or in a second marriage—or if you just don’t want responsibility for your spouse’s finances—filing separately may make more sense.

Cons. For most married couples, filing separate returns will result in a higher tax liability, and it can also affect your ability to maximize saving for retirement in an IRA. (Married couples filing individually typically can’t contribute directly to a Roth IRA if they have more than $10,000 of income.)

The other big downside is that filing separately blocks access to certain tax breaks—including the child and dependent care tax credit and the ability to deduct interest on student loans. In addition, for those receiving Social Security benefits, a larger percentage of the payments may be taxable.

The bottom line? Most married couples come out ahead when they file jointly. You can switch back and forth each year, but when you file separately, both spouses must use the same election (standard or itemized deduction).

Strategy Activity Update

Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.

Dividend Income

Sell Eaton Corp. (ETN)

Sell Cash

Buy Johnson & Johnson (JNJ)

Buy NextEra (NEE)

Buy Eli Lilly (LLY)

AIQ Tactical Global Growth

Sell Cash

Buy iShares Core S&P Mid-Cap ETF (IJH)

AIQ Tactical Defensive Growth

No trades

AIQ Tactical Multi-Asset Income

Sell iShares J.P. Morgan EM Local Currency Bond ETF (LEMB)

Buy Invesco Senior Loan ETF (BKLN)

AIQ Tactical High Income

No trades

Recent Adviser News and Insights

Looking Ahead

Next week, we’ll be poring over fresh data on inflation, retail sales, manufacturing, homebuilding, consumer sentiment and small business owner confidence. We’ll break it all down and explain why it matters to you.

Remember to visit www.adviserinvestments.com for our timely and ongoing wealth management commentary.

About Adviser

Adviser is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit www.adviserinvestments.com or call 800-492-6868.

Please note: This update was prepared on Thursday, March 9, 2023, prior to the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein—including but not limited to the Your Question Answered section—should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Purchases and sales of securities listed above represent all securities bought and sold in each strategy during the period stated. Each strategy’s portfolio generally includes more holdings in addition to the transactions listed above and in some cases the securities listed above may only represent a small portion of the particular strategy’s complete portfolio. Further, the securities listed above are not selected for listing based on their investment performance; thus it should not be assumed that any of the securities listed above were profitable or will be profitable, nor should it be assumed that future recommendations will be profitable. Clients and prospective clients should only make judgements about a strategy’s performance after reviewing the strategy’s composite performance information. There is no assurance that each security listed above will remain in the strategy’s portfolio by the time you have received or read this email. Securities are listed for informational purposes and are not intended as recommendations. Existing investor accounts may not participate in all transactions listed above due to each account’s particular circumstances.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

Companies mentioned in this article are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them.

Third-party publications referenced in this article (e.g., Citywire, Barron’s, InvestmentNews, CNBC, etc.) are independent of Adviser Investments. Readers should note that to the extent any third-party publication linked to in this piece also contains reference to any of the subscription content written by Dan Wiener, such references only pertain to the respective subscription services and are not reflective of Adviser Investments’ investment recommendations or portfolio performance. Newsletters are operated independently of Adviser Investments. Opinions and statements contained in third-party articles are for informational purposes only; they are not investment recommendations.

The Adviser You Can Talk To Podcast is a registered trademark of Adviser Investments, LLC.

The Planner You Can Talk To is a registered trademark of Adviser Investments, LLC.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2023 Adviser Investments, LLC. All Rights Reserved.