Firms highlight importance of financial plan amid Fed rate cuts

In the wake of a Fed rate cut, investors might consider longer-term bonds or smaller-cap stocks to maintain yields amid falling returns from savings accounts and certificates of deposit, financial advisers said.

Meanwhile, area firms have proactively changed some investments in anticipation of the cut. Still, everyone’s financial plans are unique, and advisers stressed developing a plan with a professional.

In September, the Federal Open Market Committee slashed the target range for the federal funds rate by half a percentage point to 4.75% to 5%. The Fed uses the rate to control money supply and inflation. It’s also the interest rate at which banks lend money to each other overnight.

Clay Nickel, director of investment strategy for Arvest Wealth Management, discussed the significance of the widely anticipated cut.

“It’s significant, mostly from the standpoint that it signals that the Federal Reserve is changing their regime to a rate-cutting regime,” Nickel said. “You’d anticipate that there would be further rate reductions going forward.”

Nickel said the market had already expected the Fed would start to cut rates, “so there’s already been some market movement.” With lower rates, investors and savers can expect reduced returns on money market accounts and bank instruments, such as CDs and savings accounts.

“We’ve been saying now for the better part of a year that there’s an opportunity for them to start to buy into the bond markets,” Nickel said. “Depending on their risk tolerances, possibly even the stock market. Unfortunately, they’ll probably wait to do that until they actually see a much lower interest rate in short-term instruments before they start to make that move. At that point the concern is they’ll be well behind the curve.”

Nickel said a big mistake investors make is they are “way too active in their investment portfolio.” Once investors make longer-term bond or stock market investments, they can “let it sit and let those investments work for them.”

“Once you get the ingredients in the oven, and you get it set to the right temperature, you just keep the oven door closed,” he said. “The more you open it, the more you tamper with it, the worse things turn out to be.” The same goes for investing: He stressed a “set it and forget it” approach and recommended reviewing this if the overall environment changes.

FIRM MOVES
“As a firm, we’ve already begun positioning our managed portfolios for these changes in interest rates,” Nickel said. “For example, we had already purchased some longer-dated bonds within the portfolio. And, we had done some shifts within the stock portion to include areas that tend to act more favorably as interest rates drop.”

Examples include smaller-company stocks and regional banks. The firm started purchasing longer-dated bonds almost a year ago, adding to it over the past year. The stock investments have taken place over the past six to eight months.

Mortgage refinancing could be another beneficial financial move if someone recently purchased a house at a higher rate. Nickel said the Fed cuts will influence mortgage rates, even though they are not directly tied to the federal funds rate. The lower rates could also make home buying easier for those waiting to buy a home.

“As we look at the environment today,” Nickel said,” there’s a balance of risks between further economic expansion and potential for economic slowdown. The Federal Reserve is watching this also because they are trying to monitor both potential for inflation, if the economy accelerates at a level that makes it too hot, but also then the potential that because interest rates have been so high, is there already an effect that is transpiring that will create an economic slowdown or a recession.”

He said the Fed, Wall Street and other investors, including Arvest, are monitoring labor market data and monthly jobs reports “to determine if we tip into a mild recession or if we continue on a healthy growth path.”

Andy Arnold, director of retirement plan services in the Trust & Wealth Management division of First Security Bank, said the firm had been planning for the cut because it was expected. The market has “priced in” the cut and about 2 percentage points in additional rate cuts over the next year. He said it was needed because policy was “overly restrictive, given the significant moderation in inflation and the Fed’s confidence in its continued decline.”

PLAN SIGNIFICANCE
He stressed the importance of a financial plan and said if an investor has cash to allocate for long-term investments, now’s the time to talk to a professional. Hannah and Heath Stanley are the founders and principals of New Wave Wealth Advisors in Springdale.

Asked whether investors should change how they invest in a lower-rate environment, Heath Stanley said not necessarily differently. He cited the importance of consulting with financial advisers to develop an investment plan and noted that “diversification is always going to be the key.” Hannah Stanley also cited the importance of long-term plans and “slow, calculated changes.”

“The worst thing that an investor can do is to have an emotional knee-jerk reaction to anything, whether it be a Fed rate move up or down, whether it be a presidential election, whether it be a fear-tactic news marketing from the various news outlets,” Heath Stanley said. “Investing emotionally can always be the worst thing that someone can do.”

With a financial plan, he said investors might move from short-term bonds and fixed-income markets to longer durations, up to 20 years. Investors can lock in the higher rates before they fall. Hannah Stanley noted that the firm has proactively made fixed-income duration adjustments for several months.

“We just now saw the yield curve un-invert on the two-year to 10-year,” Heath Stanley said. “It’s been inverted for about 18 months … The yield curves are starting to normalize, so … you might see some of those fixed-income securities or the bond markets move a little bit further out on the yield curve.”

Joshua Montanez, lead wealth management adviser of Montanez Financial, a financial planning group associated with Northwestern Mutual, said the firm has acquired longer-duration bonds and locked in the rates, which are expected to continue falling.

Montanez also emphasized the importance of diversification and that with a long-term investment plan, short-term changes “will play itself out over time.” Those with short-term plans for cash in savings accounts can also look at moving the money to a CD. If not, it might be time to move it into the market.

Financial advisers also cited the changes in market returns this year that have spread across the market. In past years, the returns were isolated to large market capitalization firms, referred to as the magnificent seven stocks, and the volatile technology sector.

“We’re seeing breadth in both the S&P 500 and the Dow as well, which is a positive sign for us because it’s better for participation across the larger spectrum,” Hannah Stanley said. “So investors, that have been hesitant of those high flyers and growth that has been so isolated, they used CDs and fixed income as a safe haven while rates were higher. Now that rates are coming back down, they are going to have to strategically and slowly kind of reposition some of their portfolio and diversify it into those other equities positions that aren’t as volatile as what we’ve seen in the last three years.”

Montanez added that international stocks could provide returns as rates come down in other countries in the coming years.

‘MUCH NEEDED’ CUT
Heath Stanley said the recent Fed cut was “much needed” and that “market fundamentals are holding steady, holding strong.”

“We believe the Fed target rate right now is somewhere around 3.5,” he said. “I think they’re going to take time with the lagging of the data to get there, but a 50-basis-point cut right out of the gate shows … that the inflation metrics are in line, they feel good about where that’s at and that their goal now is to get the Fed rate back in line.”

He expects the Fed will take between 12 and 18 months to do so.

“I personally think that they’ve done a good job on the way up and the way down, but they’ve been patient,” Hannah Stanley said. “They’re trying to make sure that everything’s in line before they knee-jerk into anything. We’re hopeful and optimistic to spur further growth for the next one to three years in the market.”

Montanez said that the lower rates will contribute to economic growth as companies looking to grow can borrow more at lower interest rates.

“It’s giving companies the ability to get back into the growth mode, which inevitably is not just in the stock market, but that’s just our economy,” he said. “It gives us the opportunity to really see the economy continue to pick up momentum over time.”