The Federal Reserve increased interest rates to the highest level in a decade during its June meeting, and experts are anticipating at least two more hikes before the year’s end. While this could be viewed as a positive sign of the improving U.S. economy, some experts—such as Brian Chappatta of Bloomberg—are concerned that this aggressive hiking is flattening the U.S. yield curve, an event that has traditionally been followed by recession. In the wake of all this turbulence, firms are urging financial advisors to educate their clients on what exactly the Federal Reserve’s tightening means for the market and how they can adapt their strategies to account for it.
Since the beginning of June, 40% of firms in our Asset Management Monitor – Advisor coverage group have discussed the Fed’s interest hikes, and almost all of the firms promote the commentary on their homepage. For most firms, the take-home message is clear: Don’t panic. There are reasons to believe that the future is not as bad as it currently seems, and there are also ways to persevere in this less benign market environment.
In The Fed Sets the Stage for More Hikes in 2018 commentary, Lord Abbett acknowledges that Fed hikes are causing a flattening of the U.S. yield curve, but the firm also encourages its clients not to apply the implications of historical yield-curve flattening trends to the current market. The firm cites a negative term premium as a factor distorting the predictive quality of the changes in the yield curve.
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Putnam even presents the Fed’s actions as posing a possible benefit for patient investors in its Fed Actions Create a Long-Term Opportunity article. The portfolio manager explains how the extreme movement of interest rates and the resultant strengthening of the U.S. dollar have slowed the rise of the euro, causing a wide spread in global yield differentials. If investors position themselves now, it will prove beneficial for them when the U.S. and Europe’s yield curves converge again.
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In Three Ways to Keep Your Head above Water as Rates Rise, AB discusses three strategies—namely, balancing interest rate and credit risk, diversifying portfolios and continuing investing in general—to combat rising interest rates successfully.
While it can be easy to get caught up in the possible negatives of Federal Reserve tightening, many asset management firms want financial advisors to relay to investors not only that an overly pessimistic outlook can be more damaging than they think but that they also can’t rely completely on this reassurance and miss the opportunity to make appropriate changes to their strategies now.