Have Interest Rates Peaked?

What We’re Watching This Week

Please note: This update was prepared on Thursday, March 23, 2023, prior to the market’s close.

• Another Fed rate rise. The central bank remains steadfast in its focus on fighting inflation, raising interest rates by another quarter point yesterday. While Federal Reserve Chair Jerome Powell said policymakers considered a break in the current rate-hike cycle given recent instability in the banking sector, it’s clear that the battle to subdue inflation continues to take priority. However, central bankers hinted that a potential pause in the action could be coming. In the meantime, bonds have benefited of late despite the Fed’s interest-rate policy, as prices have rebounded—see the Bonds Are Back in Vogue story below.
• Banking contagion contained. Powell called the recent collapse of Silicon Valley Bank (SVB) “an outlier” in terms of the bank’s high percentage of uninsured deposits and its well-above-average exposure to interest-rate risk. What’s evident, he said, is that policymakers need to strengthen regulation and supervision in banking. That will mean safer banks for consumers but could also mean fewer profits for bank investors. See below for Adviser Board Member Jim Lowell’s take.
• Housing bouncing back. The economic impact of the banking crisis remains unclear, but one offsetting factor could come from the beleaguered housing market, which is showing strength heading into the spring selling season: Sales of existing homes jumped 14.5% in February from January, reversing 12 months of declines. Meanwhile, the median cost of existing homes fell 0.2% in February from the same time last year, and the jolt to banks has nudged mortgage rates lower.

Jim Lowell on the Banking Crisis

SVB’s sudden collapse initially gave me that spine-tingling feeling of seeing a shark fin off the beach where I swim in Martha’s Vineyard.

Statistically, though, a major bank collapse happens a lot less frequently than a shark attack. Over the last five years, there have been nine bank failures, compared to 57 unprovoked shark attacks in 2022 alone.

After the shock and minor market panic, the Fed lifeguards rushed in and made us feel like it’s safe to go back in the water. Acting with alacrity, they revived confidence with swift action that secured depositors (not shareholders)—meaning that for all practical (banking and payroll) purposes, the banking mini-crisis was over almost before it began.

Like me, your wealth advisor has been here before. Personally, I’ve lived through four major banking crises in my post-college career. Each time, the financial world was upended. Each time, remedies were proposed, lessons were learned, response times improved, and solutions were quicker on the draw.

That could be part of why I didn’t feel panicked by SVB so much as disappointed in our regulators. But even more, I was calmed by the knowledge that our firm has never been in better shape to help clients like you and me navigate through economic and market difficulties with a tailored plan that takes the best and worst of times into account.

With so many pundits giving their alarmist, post-facto SVB predictions, I found Chief Investment Officer Tim Clift’s message reassuring. He cuts to the core of what matters most to me, and possibly to you: Expert guidance and perspective from a trusted partner in a market moment when trust is in short supply.

Of course, crises are never in short supply. And this latest banking emergency, like all the others, may seem to have appeared out of nowhere. But on cursory inspection, it developed due to exactly the kind of lending models and behaviors that bull markets mask with largesse and bear markets expose as unwise.

So, while I know it’s unwise to make a major change to my financial plan based on day-to-day headlines, what is wise? Keeping in touch with your dedicated, disciplined wealth management team at Adviser. Thanks to them, I invest with far greater confidence and with a reasonable hope that the next fin I see will turn out to be a dolphin’s.

Bonds Are Back in Vogue

When bond prices were falling along with stock prices in 2022, many clients asked, “Why do I own bonds?” The banking shake-up this month highlights the value of bonds in a diversified portfolio. As fear and uncertainty spiked, investors fled to safety, sending the price of high-quality bonds higher.

The chart below shows the month-to-date and year-to-date returns for a handful of bond-market benchmarks tracking investment-grade and government-issue bonds. So even though the “falling yields” you may have been hearing about in recent weeks seem like a negative short-term outcome for bond investors, the opposite is true.

We wouldn’t be surprised if the upward momentum slows as the banking situation resolves, but it’s a good reminder that even the placid bond market can move quickly in response to current events—and that staying diversified redounds to your benefit over time.

Do You Need Disaster Insurance?

Our advisors think through worst-case scenarios—even ones that are impossible to predict, like natural disasters. So please call us if you or your loved ones are ever impacted by such an event. Meanwhile, here are some ways we can be ready when lightning (or another natural disaster) strikes.

1. Understand what is covered. Your home insurance policy likely covers many types of disasters and weather events, including wind, fire and lightning strikes. However, it does not always cover damage from floods or earthquakes. Talk to us if you live in a flood zone or are at high risk for other types of natural disasters so we can discuss the need for a separate policy.
2. Take inflation into account. If you haven’t updated your homeowners policy since completing a major renovation, it’s time to make sure your cost to rebuild is covered in today’s dollars. Your policy may have been suitable when you first moved in, but rising costs for materials and labor may mean your payout level is insufficient today.
3. Act fast to process your claim. Always file an initial claim with your insurance company as soon as you can after a disaster, even if the claim is incomplete—you want to secure your place in the queue. Report big-ticket items first to open the claim, then add to your file as you continue to document lost items. Depending on the language in your policy, filing fast may qualify you for an immediate payout to help with living expenses.
4. Navigate mortgage snags and property-assessment issues. Depending on the severity of the damage or loss, talk to your lender about a temporary break on your mortgage—they may work with you to waive payments for a limited time. And check with your town to see if your property taxes will decrease, assuming you believe the damages may lower the resale value of your home.
5. Get ahead of tax considerations. The IRS may extend certain tax deadlines for affected taxpayers if the losses are grave enough. And in some cases, you can take a casualty deduction.
6. Revamp your financial plan. If you find yourself underinsured in the wake of a disaster, we can help by reviewing your financial plan to examine the effects and suggest next steps. We would also be happy to discuss your homeowners insurance policy to make sure it meets your needs.

Don’t hesitate to call on us to help you prepare for and respond to natural disasters or any event that could change your financial picture. We’re here for you.

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 iShares Core S&P Mid-Cap ETF (IJH)

Buy Fidelity MSCI Communication Services ETF (FCOM)

AIQ Tactical Defensive Growth

AIQ Tactical Multi-Asset Income

Sell Invesco DB Agriculture Fund (DBA)

Sell Cash

Buy iShares Gold Trust (IAU)

Buy iShares 7-10 Year Treasury Bond ETF (IEF)

AIQ Tactical High Income

No trades

Looking Ahead

Next week delivers a bounty of economic data to examine, including on house prices, consumer confidence, retail and wholesale inventories, personal income and spending, consumer sentiment, and the February personal consumption expenditures index (PCE), the Fed’s preferred inflation gauge.

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 management, financial and tax planning, managed 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.