Blog - NorthStar Capital Advisors

What will the new administration do first?

Now that the election is over, what will the new administration prioritize in the new year?

Here are a few things we’re watching in the months ahead:

The debt ceiling debate may reignite in early 2025.

The debt ceiling, the cap on the total amount of debt the U.S. can hold, has been suspended as part of a deal made in the last Congressional fight.¹

When the cap returns in January, it may kick off a fresh round of debates and draw attention to the more than $35 trillion the U.S. holds in debt.²

Will lawmakers take action to stem deficit spending? Or will they continue to kick the can down the road?

We’ll have to wait and see.

Tax cuts may be extended past 2025.

A number of popular individual and small business tax breaks are scheduled to expire at the end of 2025, which would trigger higher individual income tax rates and increase estate taxes.³

President-elect Trump may extend or make some or all of these provisions permanent as part of his 2025 priorities.

However, tax cuts lead to lost revenue for the federal government, which would end up adding to the national debt.

It’s hard to know how lawmakers will square these competing priorities, but we’re keeping a close eye on it and will keep you informed.

Tariffs could become a key issue for businesses.

The new administration has announced plans for broad tariffs on imports, especially on goods from China.⁴

Tariffs can impact inflation and business earnings by increasing the cost of goods and supplies from overseas.

If trading partners respond by adding their own tariffs on U.S. goods, it could hurt overseas demand by making our products more expensive.

How deep or broad those tariffs could be is a big source of uncertainty going into the new year.

However, it’s likely that any new policies would come with many rounds of debate, so the actual impact of tariffs may be much less than the worst-case scenarios.

We’ll keep you updated.

Markets may become volatile with uncertainty.

While the uncertainty of the election has faded, new uncertainty around policy priorities has replaced it.

We’re expecting volatility ahead as analysts digest reports and adjust their positions ahead of the new year.

Investors are also watching data for hints about where the economy is headed next.

The bull market is now over two years old. Should we be worried that a bear market is around the corner?

Probably not.

The chart below shows you the average age of recent bull markets.

While the past doesn’t predict the future, we can see that two years isn’t historically long for a bull market. In fact, the longest bull market on record lasted more than 12 years.⁵

A sudden turn to a bear market is not likely at this point.

On the other hand, there are a lot of risks in this environment that could shake things up.

If geopolitical issues flare, inflation rebounds, or the business environment starts to look dicey, we can expect markets to correct.

Sources:

1. https://bipartisanpolicy.org/blog/debt-limit-2025-treasury-cash-on-hand/

2. https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/

3. https://tax.thomsonreuters.com/blog/what-to-know-about-tcja-expiration/

4. https://www.yahoo.com/news/trumps-proposed-tariffs-raise-prices-205300785.html

5. https://www.hartfordfunds.com/practice-management/client-conversations/investing-for-growth/10-things-you-should-know-about-bull-markets.html

Chart sources: https://finance.yahoo.com/news/the-bull-market-is-2-years-old-heres-where-wall-street-thinks-stocks-go-next-100050648.html?guccounter=1

*Current bull market as of 11/20/24

Can the bulls keep running?

The bull market has officially turned two.

Markets have also had an impressive run since the bottom of the bear market.

Since October 12, 2022, the S&P 500 has gained over 60%.¹

Can the bulls keep running?

Given the strong performance in 2023 and the strong 2024 we’re having, it’s reasonable to worry that markets might retreat.

You can see in the chart below that consecutive strong years have happened before.²

That said, past performance doesn’t guarantee that optimists will continue to drive markets.

In fact, it wouldn’t be a surprise to see a pullback ahead.

However, there’s reason to hope for continued optimism.

The bull run we’ve experienced this year has a strong grounding in economic factors.

Factor #1: A growing economy generally boosts markets.

While markets are often impacted by short-term trends and investor psychology, stocks generally follow the economy.

The latest data shows that economists are upbeat about where economic growth is headed.³

Since the stock market is forward-looking, that’s a positive for the bulls.

Factor #2: The Federal Reserve’s interest rate policy is loosening.

A big part of the market story this year is the hope that the Fed will be able to lower interest rates without causing inflation to spike or tipping the economy into recession.

Lower interest rates are generally positive for markets because they make it cheaper for firms and consumers to borrow money.

Lower corporate borrowing costs can fuel growth, R&D, acquisitions, and other capital-intensive projects that boost stock prices.

Factor #3: Optimism about corporate earnings.

While earnings season is still underway, the general consensus is that corporate earnings are looking solid so far.⁴

That’s great news for markets.

A recent survey of corporate leaders also found that the majority expect company profits to increase.⁵

Taken together, that’s a positive for the bulls.

However, there are a number of risks we’re watching.

With markets regularly testing new highs, stock valuations are also high.

That means some stocks may be overvalued.

If investors lose optimism about growth, markets will likely retreat.

Uncertainty surrounding American politics and global geopolitics is also high.

While elections and conflicts generally don’t have long-term effects on markets, they can certainly trigger selloffs.⁶

Overall, we’re still cautiously optimistic about where markets are going in the final months of the year.

It can be tempting to look at market highs and decide to sell and stand on the sidelines.

However, timing markets perfectly is impossible and you risk missing out on future growth.

Sources

1. https://finance.yahoo.com/news/the-bull-market-is-2-years-old-heres-where-wall-street-thinks-stocks-go-next-100050648.html

2. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

3. https://www.wsj.com/economy/economists-predictions-survey-charts-68ba82d6?mod=article_inline

4. https://www.nasdaq.com/articles/stocks-edge-higher-solid-corporate-earnings-boost-market-optimism

5. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/survey-results-expectations-for-company-performance-by-industry

6. https://www.nytimes.com/2024/10/15/business/stock-market-valuation-outlook.html

Chart sources: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

Impact of hurricanes

Are you well and safe?

Have any of your loved ones been impacted by Helene or Milton?

It’s been a rough couple of weeks for the Southeast.

Storms can take a massive toll on families and communities, with challenges that take months and years to resolve.

With an active hurricane season upon us, we’d like to take a moment to talk about how natural disasters can affect markets and the economy.

Natural disasters typically impact the economy in a few ways:

Regional, national, and even international supply chains can be disrupted as roads and ports close and goods struggle to move from place to place
Economic growth can slow down as businesses shut down, jobs are lost, and consumer demand slows down
Markets often experience short-term volatility as investors react to the news and rush to buy and sell
Energy prices may spike due to scarcity and supply disruptions

While some companies (such as insurers) typically take a hit from anticipated disaster losses, other businesses (like generator manufacturers) may see a spike due to expected demand.¹

This chart shows the financial cost of some hurricanes in the last two decades.

While natural disasters may have a severe short-term impact on local and regional economies, research suggests the long-term negative effects are limited.²

One note to consider: estimates of Helene and Milton damage may be low as it may take years to account for the full cost of property damage, business closures, and economic disruption.

Let’s also keep in mind that billions of dollars in financial losses are massive, but they’re still a drop in the bucket of the overall economy, which is over $27 trillion in size.³

Of course, the plain numbers don’t tell the full story of lives lost and lives disrupted.

Hard-hit areas may take a long time to recover, and some places may never fully return to normal.

In the weeks and months to come, we may see an impact from the hurricanes on inflation, unemployment, and growth data.

Sources:

1. https://www.cnbc.com/2024/10/07/generator-maker-generac-soars-insurance-stocks-fall-on-hurricane-milton.html

2. https://www.frbsf.org/wp-content/uploads/wp2020-34.pdf

3. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2023&locations=US&start=1960&view=chart

Chart sources: https://www.investors.com/news/hurricane-helene-34-billion-price-tag-stock-market-impact/

https://www.cnbc.com/2024/10/08/hurricane-milton-could-cause-as-much-as-175-billion-in-damages-according-to-early-estimates.html

https://www.kiplinger.com/slideshow/business/t019-s001-most-expensive-natural-disasters-in-u-s-history/index.html

What do you know about interest rates?

Whenever you listen to financial experts, there’s one topic that will almost always come up: interest rates. But what do interest rates have to do with your portfolio and wealth?

It turns out, a whole lot.

When you hear the term “interest rates” on the news, it’s usually referring to the Federal Funds Rate, which is the rate that banks use when borrowing from one another. This interest rate is the benchmark set by the Federal Open Market Committee (FOMC), and factors in current economic conditions like inflation, employment, and GDP growth.

But why should you care about the Federal Funds Rate?

Because when the country’s benchmark interest rate changes, it has a downstream effect on everything from your mortgage to your investment portfolio. In fact, just a one percentage point decline in interest rates can increase disposable income for individuals across the earning spectrum.¹

Take, for instance, a home mortgage. Say you’re looking to purchase a $346,900 home. With a 7% mortgage rate and a 20% downpayment, your monthly payment would be $1,846. But if your rate decreases by just 1%, you would pay $1,664, a savings of $182 per month. If you factor this change over a 30-year mortgage, you’d save a total of $65,691* in interest.²

Your mortgage is just one example of how an interest rate change can directly affect your wealth. Let’s zoom out to see what happens to the economy, and the downstream effects of interest rate changes.

When interest rates rise

While economic growth is good, too much of it can lead to an overheated economy where prices are rising and inflation is a concern. In these scenarios, the FOMC is likely to increase interest rates to help maintain economic stability.

However, an increase in the Fed Funds Rate is usually not good for stock prices since corporations have a harder time borrowing money and expanding during high interest rate periods.

Here’s how you can look at the differences between rising and falling interest rates:

One last thing: Don’t forget about lag time!

Hopefully, the correlation between interest rates, stocks, debt, and the economy is starting to click. But, you should keep in mind that when interest rates change there is usually a lag time between the policy change and its effect on the economy. According to research from the Federal Reserve Bank of St. Louis, it can take anywhere between 18 months to 2 years for interest rate changes to have an impact on the economy.³

So, the next time you hear about a potential interest rate change, remember that it will take some time before its effects are felt in the economy, and your portfolio.

New presidential candidate? (What it could mean)

A lot has happened recently.

After weeks of gains, markets slid as investors took a step back from big technology stocks.¹

At the same time, a global IT outage took major corporations offline across the world.

President Joe Biden withdrew from the election, injecting more uncertainty into the tight race.²

A shooter came close to assassinating Donald Trump at a campaign rally.³

What could all this mean for investors? Let’s discuss.

Crowdstrike, a global IT outsourcing company, took millions of Windows devices offline with a bad update.

Despite causing hours and days of chaos for airlines, banks, hospitals, and other companies, the economic impact of the outage is likely to be muted.⁴

However, it shows just how interconnected and fragile our technology infrastructure can be.

Markets bounced back quickly from the tech-triggered slide.²

It’s pretty common for markets to recover from a slide when overall sentiment or fundamentals haven’t shifted

In this case, the quick correction was mostly concentrated in the tech sector and was related to investors shifting their positions away from some of the sector’s biggest winners.

Let’s use this as a teachable moment:

One of the challenges of being a long-term investor is accepting down days and weeks.

Investors who panic and sell miss out on the strong market days that often follow.

While markets rebounded back quickly this time, that’s not guaranteed.

We’re expecting markets to remain volatile as investors position themselves ahead of major earnings reports and economic data.

What could a new Democratic presidential candidate mean for investors?

In the short term, extra uncertainty around the election could stoke volatility as traders revisit their bets.

However, in the medium to long term, the election isn’t likely to have much impact on markets at all – despite what the headlines might tell you.

Here’s a quick look at how the S&P 500 performed when each party held the White House.

As you can see, markets grew regardless of which party held the presidency.⁵

And – markets did better with a divided Congress.

That’s likely because a legislative branch split between parties makes it harder to pass new tax laws or other legislation that could affect business performance.

Bottom line: market fundamentals haven’t significantly changed but we expect more volatility ahead.

We’re watching the market and economic data closely and we’ll keep you informed along the way.

Sources:

1. https://finance.yahoo.com/news/asian-stocks-track-us-decline-224153088.html

2. https://finance.yahoo.com/news/stock-market-news-today-tech-roars-back-as-sp-500-nasdaq-surge-ahead-of-earnings-200038261.html

3. https://www.cnn.com/2024/07/23/politics/pennsylvania-state-police-commissioner-reveals-stunning-info-about-trump-shooting/index.html

4. https://www.usatoday.com/story/money/investing/2024/07/19/us-stocks-uninterrupted-crowdstrike-outage/74469633007/

5. https://get.ycharts.com/resources/blog/an-advisors-guide-to-elections-and-the-markets/

Chart sources: https://get.ycharts.com/resources/blog/an-advisors-guide-to-elections-and-the-markets/

Understanding Your Role and Responsibilities as a Power of Attorney

We wanted to provide you with some essential information regarding the role and responsibilities associated with being named a Power of Attorney (POA).

This is a critical aspect of estate planning and can have significant implications for both you and the principal (the person who has granted you this authority).

What is a Power of Attorney (POA)?

A Power of Attorney is a legal document that grants a person (referred to as the agent or attorney-in-fact) the authority to act on behalf of another person (the principal). The extent of this authority is explicitly outlined in the document. It can range from very broad, sweeping powers to limited authority for specific circumstances.

There are different types of POAs:

Immediate POA: Goes into effect as soon as it is signed.
Springing POA: Only becomes effective if the principal loses capacity. However, the Springing POA is less favored in estate planning because proving incapacitation can be challenging.

It’s crucial to understand the specific terms outlined in the POA document you hold, as this will dictate the scope of your responsibilities and powers.

Your Responsibilities as a POA

Being named as a POA means you have the legal authority to act on someone else’s behalf. This role is often utilized when the principal becomes ill, disabled, or is otherwise unable to manage their affairs. Here are some common responsibilities you may be expected to undertake:

Financial Management: Oversee and manage the principal’s financial affairs.
Bank Accounts: Have direct access to and manage the principal’s bank accounts.
Insurance Decisions: Make decisions regarding the principal’s insurance policies.
Estate Documents: Maintain possession of and manage estate documents.
Tax Returns: File the principal’s tax returns.
Safe Deposit Box: Access and manage items in the principal’s safe deposit box.
Real Estate Transactions: Sign documents related to the sale or purchase of real estate.
Detailed Record-Keeping: Keep meticulous records of all financial transactions, including bills paid, assets sold or traded, and income collected. It’s also important to document your own expenditures if you seek compensation for your efforts (e.g., saving gas receipts, mileage, etc.).

What a POA Cannot Do

While the POA grants significant authority, there are limits to what you can do:

Write, Amend, or Revoke Estate Plans: In most states, you cannot write, amend, or revoke a will, trust, or other estate planning documents.
Vote on Behalf of the Principal: You cannot vote in public elections on behalf of the principal.
Make Decisions Beyond the Document: You cannot make decisions that are not explicitly stated in the POA document.
Transfer Assets to Yourself: You cannot transfer the principal’s assets into your own name unless explicitly authorized.
Borrow or Lend Money: You cannot borrow or lend money on behalf of the principal unless the POA document specifically grants this authority.

Durable Power of Attorney

One important aspect to understand is the concept of a “Durable” Power of Attorney. A Durable POA remains in effect even if the principal becomes physically or mentally incapacitated. This means your responsibilities and authority will continue regardless of the principal’s health status. Without this durable component, your role as POA would cease if the principal becomes incapacitated.

Final Thoughts

Being named a POA is a significant responsibility and a powerful tool in estate planning.

It is essential to fully understand the scope of your authority and the duties you are expected to perform.

Inflation relief

After months of simmering inflation reports, it looks like inflation finally eased slightly in April.¹

Are prices stabilizing? Can we breathe a sigh of relief?

Let’s dig a little deeper.

What’s inside the latest inflation report?

Economists typically look at two major inflation gauges: the Consumer Price Index (CPI) and the Personal Consumption Expenditures Index (PCE).

In the latest CPI report, we learned that overall “headline” inflation rose 3.4% (year-over-year) in April.¹

Analysts also look at “core” inflation by stripping out volatile food and energy costs – that metric climbed 3.6%, the lowest since April 2021.

Why? Because food and energy have very volatile prices that can skew monthly data.

The chart below shows just how far inflation has come down since its 2022 peak.

Are we finally done with stubborn inflation?

I think it’s too soon to call since we’re just looking at one report.

Let’s see what the next few months show before celebrating.

We know inflation is still higher than anyone would like.

But, the April data is an improvement after months of hotter-than-expected data.

It could also be an optimistic sign that the Fed may still be able to achieve its 2% inflation target.

What does tamer inflation mean for investors?

Lower inflation points to a slowing economy and could give the Fed room to cut interest rates this year.

Traders have been telling themselves (and each other) that lower rates are coming in 2024 so they cheered the latest data.¹

Stubborn inflation is the one obstacle holding the Fed back from lowering rates so any nudge in the right direction often triggers a rally.

Other signs also point to a cooling economy.

Multiple indicators of labor market strength are trending downward, which suggests that growth is slowing.

Just 175,000 jobs were added in April, missing expectations. Earlier jobs numbers were also revised downward, which often means early estimates were too optimistic.²

Wage growth, another sign of a strong labor market, has also slowed significantly in recent months.³

Wage gains surged in 2021 and 2022 as employers struggled to attract workers but have been slowing down since.

So what does the latest data mean for you?

Markets are highly influenced by the timeline of future rate hikes this year.

That means news that the economy is slowing down may be treated as good news because it continues to build the case for lower rates.

On the other hand, signs that the Fed might keep rates high (or even raise them) may provoke more selloffs.

For long-term investors, these gyrations don’t make much difference to our goals and outcomes.

We’re more interested in trends and the bigger picture.

Be well,
Dr. Chris Mullis, PhD, CFP®

———-

Sources:

1. https://www.cnbc.com/2024/05/15/cpi-inflation-april-2024-consumer-prices-rose-0point3percent-in-april.html

2. https://www.bls.gov/news.release/empsit.nr0.htm

3. https://www.atlantafed.org/chcs/wage-growth-tracker

Chart sources: https://fred.stlouisfed.org/series/CPIAUCNS#0, https://fred.stlouisfed.org/series/CPILFENS, https://www.atlantafed.org/chcs/wage-growth-tracker

Why are markets volatile?

Markets have been very volatile lately.

What’s going on?

Let’s take a quick look at the factors that are influencing markets right now.

1. The bull market narrative has shifted

For months, investors have told a “Goldilocks” story of a strong economy, tamed inflation, and interest rates that were soon to drop.

However, stronger-than-expected economic data and sticky inflation have now complicated the story, and investors have become wary.¹

There are still plenty of reasons to be optimistic, but investors are being careful and taking in earnings data to gauge the upside potential of the next weeks and months.

2. Interest rates are likely to stay higher longer than we expected (or wanted)

A strong economy and hot inflation mean the Fed is now getting cold feet about cutting interest rates.²

Recent comments by Fed chair Jerome Powell suggest the Fed will keep rates high until economists are confident inflation is fully in reverse.

Some analysts are even pricing in the odds of another rate hike if inflation continues to remain high.³

Since investors have been banking on rate cuts coming soon, the new “higher for longer” reality is causing them to reevaluate their positions, further stoking volatility.

3. Geopolitical flare-ups are causing tensions to rise

With Israel and Iran trading attacks and a spring offensive gearing up in Ukraine, there are plenty of geopolitical worries, sadly.

Some good news (if there is any good news when so many lives are at stake) is that geopolitical shocks typically only have a temporary impact on markets.⁴

We don’t know what lies ahead, but we hope and pray for a peaceful end to the violence.

Volatility is normal after a prolonged rally

Here’s the bottom line: volatility after a strong rally is very common.

Especially at the beginning of a new quarter when investors are digesting earnings reports from the previous quarter and reassessing company performance.

Our crystal ball is in the shop, so we can’t tell you with certainty what happens next.

However, given that the U.S. economy remains healthy, with a strong jobs market and robust consumer spending, we don’t see a major risk of a correction turning into a serious downturn.⁵

Have questions? Want to talk through some concerns? Please don’t hesitate to reach out.

Sources:

1. https://www.fanniemae.com/newsroom/fannie-mae-news/hot-economy-inflation-likely-keep-rates-higher-longer

2. https://apnews.com/article/inflation-interest-rates-federal-reserve-powell-cuts-c60436c5e719ce95fc487fdb98395d09

3. https://www.ft.com/content/8c5da64b-766e-4993-86f5-aac95342432a

4. https://www.morningstar.com/news/marketwatch/20240422136/history-says-stock-market-dips-caused-by-geopolitical-turmoil-should-be-bought-not-sold

5. https://www.usnews.com/news/economy/articles/2024-04-22/gdp-inflation-highlight-week-of-economic-data

Can stocks go higher?

The stock market rocketed to new record highs after the latest Federal Reserve meeting.¹

Will markets continue to rise?

Will stocks take a dive after the recent record highs?

What could the Baltimore bridge collapse mean for the economy?

Let’s discuss.

Why are stocks on such a tear?

Despite some bumps in the road, markets have been on an extended rally that has gone on for months, notching new record highs along the way.¹

Two major factors are fueling the gains:

1. The expectation of interest rate cuts (soon)

2. Enthusiasm for tech and AI stocks

The latest Fed meeting ended with investors concluding that policymakers are serious about cutting interest rates this summer (as long as inflation data continues to trend downward).²

The Fed’s official position is that it expects to cut rates at least once this year (some Fed officials want to cut rates two or even three times).³

Investors expect lower rates to bolster the economy by making it cheaper and easier for consumers and businesses to spend, build, and grow.

Will stocks continue to rally?

Many analysts think there’s still plenty of room for stock prices to rise this year because they believe the rally is fueled by expectations of healthy economic growth.

The chart below shows some analysts’ 2024 year-end forecasts for the S&P 500 index.⁴

While you can see a few analysts are less bullish than the others, many are predicting a strong year for stocks.

Will they prove correct? Our crystal ball is in the shop so we’ll have to wait and see.

Is a correction coming?

Corrections are always possible, especially after markets reach new highs.

Much of the current rally’s steam comes from expecting interest rates to fall soon.

We should expect a pullback if inflation data comes in hotter than expected or traders think the Fed might be getting cold feet.

Technology stocks (another pillar of the rally) are also typically interest-rate sensitive since many tech companies rely on debt to fund operations (and may not produce immediate profits).⁵

Could the Baltimore bridge collapse impact the economy?

It’s not yet clear the extent to which the sudden bridge collapse and port shutdown could impact supply chains or inflation.

It’s also hard to fully reckon the human tragedy of lives lost when the bridge fell, and lives disrupted by the aftermath.

The Port of Baltimore is one of the busiest ports on the East Coast, and is a major hub for coal, sugar, and vehicles.⁶

The port’s closure may impact global coal prices as well as supply chains for cars, trucks, and other goods.

We’ll know more in the weeks and months to come.

Bottom line: The rally is looking healthy and could continue, but we expect pullbacks as investors take profits and digest new data.

As always, we’re watching and preparing for the different scenarios that could play out this year.

Sources:

1. https://www.cnbc.com/2024/03/24/stock-market-today-live-updates.html

2. https://www.cnbc.com/2024/03/20/fed-meeting-today-live-updates-on-march-fed-rate-decision.html

3. https://www.cnn.com/2024/03/26/economy/fed-officials-fewer-rate-cuts-this-year/index.html

4. https://finance.yahoo.com/news/wall-streets-most-bullish-strategist-cites-a-big-surprise-pushing-stocks-higher-morning-brief-100051265.html

5. https://www.nasdaq.com/articles/can-big-tech-stocks-thrive-in-a-higher-interest-rate-environment

6. https://www.wsj.com/finance/baltimore-bridge-economic-impact-0514d05a

Chart sources:

1. https://finance.yahoo.com/news/wall-streets-most-bullish-strategist-cites-a-big-surprise-pushing-stocks-higher-morning-brief-100051265.html

2. https://www.wsj.com/finance/baltimore-bridge-economic-impact-0514d05a, https://www.eia.gov/coal/production/quarterly/pdf/t13p01p1.pdf

Does the Fed really matter?

The Federal Reserve has been in the headlines a lot lately as analysts try to figure out when policymakers will cut interest rates.

Why does the Fed matter so much?

Let’s discuss.

The Fed’s decisions on interest rates are a big deal for markets and the economy because they affect how much it costs to borrow money.

Since businesses and consumers depend on credit to buy houses, fund business growth, pay workers, and more, interest rate policy decisions ripple across the economy.

Higher interest rates make it more expensive to borrow money and can act as a brake on economic growth.

On the flip side, higher interest rates can be a boon for investors by increasing the yield on savings accounts, bonds, and other debt instruments.

If you’ve found yourself putting off a new mortgage until rates come down or hunting down the best yield on a savings account, you’re experiencing the Fed’s actions in play.

How does the Fed change interest rates?

At a high level, the Fed sets the “target” for the Federal Funds Rate, which is the rate banks and large institutions charge each other.¹

Right now, that target is set at 5.25%—5.5%, and the actual “effective” rate is about 5.3%.

Unfortunately, you and I don’t have access to rates that low.

The rates we can get as consumers, investors, and businesses are set above that lowest rate.

Here’s how that looks in practice.

The rates offered on the market to borrowers and investors are based on factors like risk profile, collateral, and loan length.

You can see in the chart that 30-year mortgage rates are much higher than the base rate, in part because of the length of the loan.

How does the Fed influence the stock market?

You might have noticed how much stock prices can swing when fresh headlines about the Fed’s decisions emerge.

That’s because, all things being equal, lower interest rates are considered better for company performance because they incentivize borrowing and help fuel growth.

When interest rates rise, companies must pay higher rates to access credit, which can hurt their future prospects (and stock price).

Since the stock market tends to be forward-looking, the prospect of lower rates can flip the “greed” switch and trigger a rally as investors bet on future company performance.

That’s what we’ve been seeing in the past few weeks.

When will the Fed lower rates in 2024?

That is the $64,000 question. We don’t know exactly.

The Fed is choosing to move carefully and assess the data.

While we’ve made serious progress in taming inflation, there’s still a ways to go before reaching the Fed’s target of 2% inflation.²

While many investors and economists hope the Fed will start cutting rates this spring and keep to their plan for multiple rate cuts this year, others aren’t convinced.³

Some analysts don’t think the Fed will be in a position to cut rates until next year.⁴

What does all this mean for investors?

Markets are likely to stay volatile as long as interest rates remain uncertain, especially approaching Fed announcement dates.

On the other hand, signs of lower inflation or other data that would support a cut are likely to be greeted with further rallying.

Bottom line: We’re watching, discussing, and strategizing how to position clients this spring.

Sources

1. https://www.newyorkfed.org/markets/reference-rates/effr

2. https://www.reuters.com/markets/us/us-inflation-data-january-made-feds-job-harder-barkin-says-2024-02-21

3. https://www.cnbc.com/select/when-will-interest-rates-drop/

4. https://www.businessinsider.com/fed-first-rate-cut-forecast-us-economy-high-interest-impact-2024-2

Chart sources:

https://fred.stlouisfed.org/series/FEDFUNDS