How Do Interest Rates Impact Your Portfolio?
The Federal Reserve recently indicated that they will raise their benchmark Federal Funds rate by 25 basis points for the first time since 2018. They indicated that this will be the first of several rate hikes during the year. In addition, they’ve indicated that they will be unwinding their balance sheet as well. Let’s take a look at what these moves could mean for investor’s portfolios. Overview of interest rates Interest rates impact the amount of interest paid by issuers of bonds both in the corporate sector and by the Treasury. The direction of interest rates also impacts the interest that both individual borrowers and corporations will have to pay for loans. In the case of individuals an interest rate increase will make home mortgages and car loans more expensive. There are a number of factors that impact Fed decisions about interest rates. Over the past couple of years, the Fed has kept interest rates low to combat the economic impact of the pandemic. As the economy has recovered and strengthened, we’ve seen an uptick in inflation caused by a number of factors. The Fed’s latest moves are designed to help keep inflation in check. The Fed Funds rate is the rate at which the Fed suggests that member banks charge other member banks to borrow their excess reserves on an overnight basis. Interest rates don’t necessarily impact the stock market directly, but the prospect of higher interest rates can have an impact on companies who typically borrow to finance their operations and on banks and other financial services companies. Higher rates can serve to depress the earnings of industrial and consumer companies who borrow to finance their operations. How interest rates impact your portfolio Higher interest rates impact investors in different ways. For investors in bonds or bond mutual funds and ETFs, higher interest rates will drive down the value of their bond holdings. For individual bonds this will lower their price in the secondary market. Newly issued bonds will generally carry a higher yield when interest rates rise. Longer duration bonds and bond funds will feel the greatest impact as these are the bonds that will feel the greatest impact in terms of price declines from rising interest rates. Rising interest rates don’t impact stocks directly, but higher rates can have an impact on stocks nonetheless. First, higher interest rates can slow down the economy as the cost of borrowing rises. Higher interest costs can impact the bottom line of companies whose balance sheet includes a fair amount of debt. Rising rates can impact consumer spending. Mortgages become more expensive impacting the housing market and related businesses such as home builders and companies that sell goods or services in the home improvement space. Consumer purchasing can be impacted as consumers see interest costs for mortgages, credit cards and personal loans increase. This reduced spending can impact stocks across a number of industry sectors. The real estate sector is likely to feel the impact of rising rates. Financing commercial properties can be more expensive, this will impact real estate investments such publicly traded REITS. Rising rates will impact the bottom line of firms in this sector. Current interest rate hikes Arthur Bass, Managing Director of Wedbush Securities, had a number of thoughts on the Fed’s latest moves on interest rates. Bass says, “There was a dramatic move in interest rates over the past week as markets adjusted to a more aggressive Fed tightening path. This resulted from the economic projections and anticipated tightening path presented at the FOMC meeting, and Fed Chairman Powell’s comments at both the press conference and again this Monday.” He says, “Markets are now pricing 45bp of tightening at the May 4 FOMC meeting, 85bp by the June 15 meeting, and 120bp by the July 27 meeting. We expect the yield curve will invert as the Fed continues its tightening program.”. Bass adds, “Markets are currently pricing a peak in Fed Funds around 2.75% to be realized in the fourth quarter of 2023. This would be a very short tightening period by historical standards. The Fed’s tightening campaign was cut short in 2018/2019 by a significant correction in risk assets. Fed Funds peaked at 2.5% in 2018, while CPI was 1.9%. CPI is currently 7.9%, and 6.4% ex food and energy. The question facing the markets is how aggressive the Fed will continue to be as the economy corrects.” What should investors do when interest rates go up? For long-term investors rising interest rates are part of the picture over time. They should not have to make major portfolio shifts. That said, investors may want to review the fixed income portion of their portfolios. They may want to consider reducing the duration of their fixed income holdings. Additionally, as rates increase, they may want to put some new money to work in bonds with higher yields. They will also want to review their equity holdings to determine if any equities stand to be impacted positively or negatively by rising rates and adjust accordingly if appropriate in the context of their overall investment strategy. This is a good time to discuss the impact of rising interest rates with your Wedbush Securities advisor, feel free to reach out to them. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by
Organizing Your Records for Tax Season and Beyond
As we approach the end of another tax season, the topic of organizing your personal and financial records is a timely one. Here is a look at records that need to be kept for future tax returns as well as for other purposes. IRS requirements The IRS doesn’t specify any set period of time for specific types of records that must be retained, but they do have time limits as to how long records pertaining to returns should be kept. For the assessment of taxes owed, three years. There is a six year time limit for any underreported taxes that are in excess of 25% of the gross income shown on your return. There is no statute of limitations for fraudulent reporting of your tax liability. Records relating to property must be kept until the period of limitation for any property disposed of and for which a gain or loss was claimed on a return. For businesses with employees, you must keep employment tax records for at least four years after the later of when the tax was due or paid. It is generally a good idea to keep tax records, including all supporting documents used to prepare your return for anywhere from 3-7 years. Beyond these broad guidelines we suggest that you consult with your tax professional as to which tax-related records you should keep and for how long. Organizing Your Financial Records There are various financial records we may accumulate during the year and over time. Regardless of the duration of time we are required to retain these records, there are some general tips for storing documents and records to keep in mind. Safeguard your information. If you are storing paper documents, find a safe place in your home that will keep these records safe from damage or theft. This might entail a safe or another type of secure storage. For digital storage, be sure to use a secure password and to properly back up these records on a separate hard drive or in the cloud. Many experts suggest that these records be separately password protected. When storing records online be sure to use complex passwords to make it more difficult for hackers and data thieves. Be sure to use a different password than you do for personal accounts like email and online shopping. Protecting your computer with antivirus software is also suggested. In the case of paper documents, be sure to properly dispose of them when they are no longer needed. This means a cross-cutting shredder, either at home or at a shredding service. Consider moving to paperless and digital statements to avoid the risk of mail theft in the future. As far as how long to keep various records, a rule-of-thumb is three years, seven years or forever. Examples of records to be retained for at least three years include: Household bills Credit card statements Receipts from minor purchases Examples of records to be kept for at least seven years include: Canceled checks Check registers Bank statements Pay stubs, if you worked for the same employer for the entire year then the year-end pay stub might suffice. Income tax returns including all documentation Examples of record to keep forever include: Receipts for home improvements Receipts for major purchases Annual investment account statements Gift tax returns Inheritance documents Insurance policies IRA statements Mutual fund statements A copy of your will Health care proxy forms It is suggested that you keep your filing system simple and easy to navigate. It is also recommended that you go through your records at least annually. Purge any records that are no longer needed and be sure that you have everything you need. Also try to stay up to date on new developments in online storage and security for your personal computer. Financial institutions are generally required to maintain your records for a period of time. In general, the Bank Security Act (BSA) requires banks to maintain customer account records for at least five years. Other types of financial institutions and custodians may have different requirements, it’s best to check with each institution to be sure. Keeping good records is important for taxes and other issues. For taxable investment accounts, it is important to have solid records of your cost basis not only for tax reasons, but also to help determine your investment returns. To learn more about the types of records investors should maintain consult your Wedbush advisor and your tax professional. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.