Will Interest Rates Continue to Climb?


Maurice StouseBy Maurice Stouse, Financial Advisor and Branch Manager

As we head into March, we are seeing some early trends or patterns for investors. First among these are short-term interest rates. The Federal Reserve raised rates to 4.75 percent in early February. That was a .25 percent smaller rate increase than in its previous meeting. We are seeing short-term savings rates and CDs yielding at or near this level as well. Investors are left wondering if rates will continue to climb.

The Federal Reserve is keeping a close watch on inflation which, after the February report, has prices going sideways for now (as opposed to continuing to go down). Digging deep into those numbers, we see that goods are down to 3 percent and wages are now growing at 4.3 percent.

The cost of services continues to be resilient in the face of inflation. Wages may continue to wane as the white-collar labor force is seen as over employed and the same for many blue-collar professions. Restaurant and hospitality businesses continue to be seen as under-employed. There has been a lot of news about layoffs in the tech sector. While significant, those workers account for less than 2 percent of the workforce. Many of those returning to the workforce also see being productive and industrious as a key to a happy and fulfilled life.

We are also learning more about the Great Unretirement or the growth of the so-called “unretiring.” Many Americans who retired during the pandemic are coming back to work. That is a sign of relief to employers who report they need the talent and more workers. The recent passing of Secure Act 2.0 pushes back for many the required minimum distribution from their retirement savings. Perhaps they can let those assets grow longer if they are working again.

Nowhere is the need greater for workers than in health care – nurses and other medical professionals are in demand. Next, we see the growing interest and return in bonds or the bond market. Bond prices have continued to firm, and many investment institutions recommend that investors look at bonds or fixed income again as they see the total return potential much brighter for investors. They also continue to suggest that investors keep their duration at or around six years, which is in line with the Barclays bond index. That would indicate intermediate maturities or average life of bonds.

We continue to suggest investors will see greater potential with longer term bonds and duration, particularly in municipal bonds. We take note that issuance of municipal bonds is down significantly year over year with a decline of over 20 percent. Many issuers may not want to lock themselves in to long-term rates and might still be in the condition where they do not have the pressing need to issue new bonds.

We also see and hear a lot about higher yielding lower quality bonds. While those can be attractive, we suggest caution because if the economy were to weaken, that could hurt the market value of these securities.

Next, are returns. The S&P (which is tech-heavy) is up 6.8 percent, the Dow is up 1.7 percent, the Nasdaq 13.3 percent. Bonds are up approximately 1 percent and the U.S. dollar is up .3 percent (that is a bit of recovery after the dollar has been down for the last few months). Gold is up 1.4 percent. Note – we recently learned, after researching the World Gold Council, that the U.S. by far has the highest stores of gold in the world at more than 8,000 tons.

The strongest performing sectors are consumer discretionary (Tesla, Amazon, Lowes are examples of that) at 16.4 percent. Tesla, and now Ford, have announced price cuts of their electrical vehicles. The adoption of EVs worldwide has been strong but has yet to catch on in the USA. Automotive News reported recently on potential concern among dealers with regard to EVs.

Communication Services with stocks like Disney, Meta (Facebook) and Alphabet (Google) are up 13.9 percent and technology (with stocks like Apple and Microsoft) is up 13.8 percent at this writing. We observe there are just a few stocks where investor appetite has helped drive these strong returns. It is interesting that so-called growth stocks are off to a stronger start than value stocks. Value stocks would tend to have lower volatility and higher dividends but obviously they have not had as strong returns. The Dow, it could be argued, is more value-oriented and is off to one of its slowest starts since 1934.

Real estate (many being made up of REITS like Realty Income Corp, financials (banks) and materials (like Alcoa for example) have had strong starts to the year as well. Banks, both large and small, have seen loans growing. It is interesting to note that with layoffs in the tech sector, rising federal funds and mortgage rates and decreasing money supply have not hurt the jobs sector. Unemployment in the USA is near a 53-year low.

Energy, after almost two strong years, is flat for the year. The winter in Europe has been milder, the release of the strategic petroleum reserve and other factors have contributed to a strong supply and hence the prices of oil and natural gas have come down, natural gas the most dramatically of the two. We continue to watch the future of alternative sources of energy and see that many firms (Raymond James, Energy Stat, Jan. 30) openly wonder if nuclear energy is to start growing again. Construction of nuclear plants, mainly outside the USA, is growing. Within the USA, only one utility has a new nuclear facility coming online, that is Southern Company.

Health Care (pharmaceuticals like Johnson and Johnson, or broad based like CVS), utilities and consumer staples (like Walmart or Coca Cola) have lagged the market. In an environment such as this, we would expect consumer staples and healthcare to outperform so we suggest that investors be sure they include these in their equity plans.

Please note that this is not a recommendation to purchase or sell the stocks of the companies mentioned. As investors contemplate their needs and objectives, we add that we believe that a portfolio should be diversified by security selection as well as asset class and that time frame, risk tolerance, tax status and ultimate objective should be the guiding light in a well-balanced portfolio.

There are special risks associated with investing with bonds such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk and unique tax consequences. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. U.S. government bonds and Treasuries are guaranteed by the government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. CDs are insured by the FDIC and offer a fixed rate of return, whereas the return and principal value of investment securities fluctuate with changes in market conditions. An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you’re not yet 59½, you may also have to pay an additional 10 percent tax penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company’s ability to pay for them. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
Inclusion of this index is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation does not ensure a profit or protect against a loss. Holding investments for the long term does not ensure a profitable outcome.

Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management/ Raymond James. Main office located at The First Bank, 2000 98 Palms Blvd, Destin, FL 32451. Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. First Florida Wealth Group and First Florida Bank are not registered broker/dealers and are independent of Raymond James Financial Services.

Views expressed are the current opinion of the author and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.