The National Bureau of Economic Research recently explored how continued low returns can influence saving, investing and retirement behaviors. According to the report, diminished returns tend to motivate people to save more in non-retirement accounts and less in their 401(k)s, alter their investment allocations, and even delay retirement and claiming Social Security benefits.1
While recent economic indicators continue to be strong, the remainder of the year may see some headwinds. Low unemployment numbers and the potential for trade war blowback could push inflation higher, which will likely impel the Federal Reserve to raise interest rates. The Tax Cuts and Jobs Act also may cause potential pullback. Many corporations used the extra capital this legislation provided for stock buybacks, but as less of this capital fuels the stock market moving forward, trade momentum could decline by the year’s end.2
With so many moving parts in the economy, markets, global landscape and political midterm elections, it’s easy to get distracted. Some investors may consider making portfolio changes in reaction to one or more of these provocations, while others may be overwhelmed by all the noise. If you’re feeling unsure about your current strategy, remember that we’re here to help keep you on track toward your financial goals. We invite you to call us whenever you need guidance.
One thing to keep in mind is that higher interest rates do not usually make an immediate impact on the stock market. Instead, they make it more expensive for companies to borrow money, meaning some may cut back on expansion plans or retain higher overhead expenses, which reduces profits. Eventually, these activities may cause the company stock price to stagnate or even drop, but that usually happens after an extended period of time.3
However, rising interest rates could provide some fuel for the bond market with the potential for corporate bonds to outperform lower risk sectors, such as treasuries. On the whole, fixed-income investors may decide to more actively manage their portfolio’s duration, adjust yield curve positions and/or diversify their risk.4
According to Investor’s Business Daily, the market’s direction often provides the best insight into investor moves. Historically, three out of four stocks move in the same direction as the overall market, regardless of whether it’s moving up or down. Purchasing stocks when the market trends higher gives you a 75 percent chance of success, while buying when the market is declining yields a 75 percent chance of losing money.5
It’s worth noting, however, that while investors may experience a temporary decline in their account balance, buying when prices are low can position them for higher future gains when the market rebounds.
1 Emily Zulz. ThinkAdvisor. Feb. 14, 2018. “4 Ways Persistent Low Returns Affect Retirement Behavior: NBER.” https://www.thinkadvisor.com/2018/02/14/4-ways-low-returns-affect-retirement-decisions-nbe/. Accessed Aug. 16, 2018.
2 [email protected] July 9, 2018. “Will Interest Rate Hikes Hurt Stocks? Ask Jeremy Siegel.” http://knowledge.wharton.upenn.edu/article/market-update-jeremy-siegel/. Accessed Aug. 16, 2018
3 Mary Hall. Investopedia. Aug. 3, 2018. “How Do Interest Rates Affect the Stock Market?” https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/. Accessed Aug. 16, 2018.
4 Sterling Capital. June 2018. “Strategies for a Rising Interest Rate Environment.” https://6b517bbbe092ed90657e-e87f61d6c272d3a7e8ddccf5e9815e01.ssl.cf2.rackcdn.com/Strategies-for-a-Rising-Interest-Rate-Environment-June-2018.pdf. Accessed Aug. 16, 2018.
5 Investor’s Business Daily. “How Market Direction Affects Your Portfolio.” https://www.investors.com/ibd-university/market-timing/affects-portfolio/. Accessed Aug. 16, 2018.