FINANCIALLY FOCUSED

May 2023 Newsletter

Interest Rates and Inflation
The Federal Reserve has continued its tightening cycle with the 10th interest rate increase, raising the Federal Funds Rate by 25 basis points to a target range of 5%-5.25%. The Chairman's ambiguity about future plans suggests that the Fed may be adopting a more cautious approach, taking into account various economic indicators and conditions before making any further decisions.

The removal of language suggesting more interest rate hikes from the FOMC press release could indicate that the central bank believes the current level of interest rates is appropriate to maintain price stability and support economic growth. This might signal a pause in the rate hike cycle, at least in the short term.

With inflation still significantly above the 2% target, the central bank may continue to prioritize price stability to prevent the economy from overheating. The low unemployment rate, coupled with companies continuing to hire, indicates a strong labor market. Wage inflation is running above average, and businesses are passing on the increased labor costs to consumers, resulting in persistent inflation.

Based on these circumstances and the FOMC's recent statement, it seems likely that interest rates will remain elevated for the foreseeable future, and no rate cuts are expected in 2023. However, it is important to remember that the central bank's decisions will be data-dependent and subject to the evolving economic environment.

Credit Markets
With the recent interest rate hikes, the fixed income market has become more attractive in comparison to cash and money market funds. Intermediate and long-term bonds now offer relatively higher yields, providing short and intermediate-term investment opportunities. As bond prices are currently at a low point, investors can lock in higher yields by purchasing bonds at these depressed prices. If interest rates eventually decline, bond prices would likely appreciate, which could lead to capital gains for bondholders. Furthermore, when equity markets experience volatility or downturns, the fixed income portion of your portfolio may provide stability and potentially offset some of the losses.

Banking Sector
Recent concerns surrounding the banking sector have brought back memories of the 2008 financial crisis. However, the current environment is markedly different from the conditions that led to the crisis. Since 2008, regulatory reforms have strengthened the resilience of the financial system. Banks are now required to maintain higher levels of reserves, and they face increased scrutiny from regulatory authorities such as the Federal Reserve and the FDIC. These measures have made banks more robust and better prepared to withstand potential shocks.

US banks are highly capitalized, which means they have enough capital to absorb any unrealized losses on bonds held to maturity. These losses are primarily due to interest rate changes rather than a decline in the quality of the bonds. This is an important distinction, as the banks' bond holdings remain fundamentally sound despite fluctuations in their market value.

Equity Markets
We maintain a cautious approach to investing in domestic equities, focusing on quality as the main driver for investment decisions. Given the minimal revenue growth in the current quarter and decreasing margins, it is important to identify companies with controlled leverage, high free cash flow, and strong industry leadership.

Reducing overweight positions in equities during short-term rallies and diversifying your portfolio across different sectors can help manage risk. Allocating investments to defensive sectors like healthcare, household products, and utilities can provide stability during these uncertain times. Meanwhile, technology and cyclical sectors still offer some quality opportunities and will remain part of our portfolio allocation.

Expanding into emerging market countries offers additional value and diversification benefits. Given the relatively high price-to-earnings ratio of the S&P 500 compared to its long-term average, international markets present some attractive valuations.

In summary, a prudent investment strategy in the current environment should focus on quality, diversification across sectors, and the inclusion of international markets. Balancing your portfolio with a mix of defensive and growth-oriented sectors, as well as considering emerging market opportunities, can help navigate the uncertainty surrounding interest rates and potential recession risks. While the recent banking saga may evoke memories of the 2008 financial crisis, the banking sector today is considerably more stable and better equipped to handle adverse market conditions. The strengthened regulatory framework and improved capitalization of banks contribute to the resilience of the financial system, making a repeat of the 2008 crisis less likely.

Sources:
https://www.fdic.gov/analysis/quarterly-banking-profile/index.html
https://www.schwabassetmanagement.com/content/another-one-bites-dust-banking-saga-continues
https://fred.stlouisfed.org/
https://www.federalreserve.gov/newsevents/pressreleases/monetary20230503a.htm

Investment advisory services offered through Alternative Investment Advisors, LLC. (AIA), an SEC Registered Investment Advisor. AIA and its advisors do not render tax, legal or accounting advice. Fixed insurance products and services are offered through Swenson Wealth Management. Swenson Wealth Management is not a registered investment advisor and is not a subsidiary or affiliate of Alternative Investment Advisors, LLC. Swenson Wealth Management and their individually licensed and appointed insurance agents, and AIA are not affiliated with or endorsed by the Social Security Administration or any government agency.

How to Reduce Taxes on Retirement Savings
 

With an appropriate strategy, you may be able to reduce taxes on your retirement savings. Although financial services professionals don’t give tax or legal advice, a U.S. News and World Report article, 10 Ways to Reduce Taxes on Your Retirement Savings, has some good information.

Read More

Chocolate Cake in a Mug

This chocolate mug cake is made in the microwave for a fudgy, chocolaty treat that is truly decadent. It's a great recipe for nights when I need a yummy dessert that's ready in less than 10 minutes! Add a few chocolate chips to make it extra rich and gooey.

Get Cooking!

We’re thrilled to appear in these National Publications
Please click the icons to view our article.

PLEASE KEEP US IN THE LOOP

• Change or add emails
• Eliminate your landline
• Add or change cell phone numbers

You can simply email us with this info to:

MakaylaBoer@swensonag.com

Or call us at 605-274-8707

Also, consider adding us to your email address book. It will ensure you receive our correspondence.

Investment advisory services offered through Alternative Investment Advisors, LLC. (AIA), an SEC Registered Investment Advisor. AIA and its advisors do not render tax, legal or accounting advice. Fixed insurance products and services are offered through Swenson Wealth Management. Swenson Wealth Management is not a registered investment advisor and is not a subsidiary or affiliate of Alternative Investment Advisors, LLC. Swenson Wealth Management and their individually licensed and appointed insurance agents, and AIA are not affiliated with or endorsed by the Social Security Administration or any government agency.

This communication may contain information that is proprietary, privileged, or confidential, or otherwise legally exempt from disclosure. If you are not the named addressee, you are not authorized to read, retain, copy, or disseminate this memo or any part of it. if you have received this memo in error, please notify the sender immediately by Email or fax, and destroy all copies of this communication. Please be further advised that, pursuant to the Bank Secrecy Act, the USA PATRIOT Act, and similar laws, any communication in this e-mail is subject to regulatory, supervisory, and law enforcement review.