November Newsletter to Clients

Lee Chapman and Steve Byars recently attended the Schwab Impact 2022 conference for financial advisors and here are some of their key takeaways that we believe will benefit you, our clients:

First, as you may remember, Schwab recently closed on their purchase of TD Ameritrade. The conversion of your IRA, Roth IRA and other investment accounts from TD Ameritrade to Schwab will occur near Labor Day in 2023. Schwab repeatedly said that you will not have to sign any new paperwork to convert your accounts and that the conversion will be seamless. In addition, they believe the combined new company will help us help you even more through better technology and more responsive customer service. We are using the old maxim, “trust but verify” through the merger process and are cautiously optimistic. We’ll communicate details further as they become available. 

The Federal Reserve raising interest rates

The Fed raised its short-term interest rate 0.75% during the conference and many of the presenters believe it will have to continue raising rates through most, if not all, of 2023. Looking back at inflationary history, it may take all of next year to push inflation back down to 4% - the Fed’s target is 2%. It is a safe assumption that interest rates will be higher for the foreseeable future. What does mean for us as investors?

• First, as many presenters noted, higher interest rates will move us to more “normal” conditions. Bonds will pay higher yields, which is a good thing, especially for retirees;

• While higher interest rates have hurt stocks this year, stocks are now priced much more reasonably than they were over the last 2-3 years.  With a Price/Earnings ratio of about 16 for U.S. large company stocks, that is much more in line with historic averages. 

Taking advantage of higher interest rates

Several speakers noted the opportunities presented by higher, and more normal, interest rates:

• Higher rates have created opportunities within bond mutual funds for a variety of securities such as mortgage-backed securities, floating rate loans, high-quality corporate bonds, etc. We have already taken advantage by including the diversified mutual fund Dodge and Cox Income (DODIX) in many of your portfolios. DODIX currently yields 4.23%, compared to just 1.88% two years ago;

• Bonds with shorter durations were also noted as good opportunities. As a 2-year bond matures sooner than a 10-year bond, this offers the opportunity for the mutual fund to purchase a new bond with a higher yield than the previous holding. For instance, the Lord Abbett Short Duration Income fund (LALDX, LLDYX) currently yields 3.86%;

• Higher rates should also help the stocks of more established companies that have steady earnings. The mutual fund Madison Dividend Income Fund (BHBFX) fits this bill and has declined in value just about half what the S&P 500 has over the last year.

Most speakers believe the U.S. will experience a recession – albeit a mild one – in 2023. Some believe we may already be in one but, of course, we won’t know that until the National Bureau of Economic Research tells us after the fact. The good news is stock investors buy companies based on their predictions of future earnings so, historically, stock prices rebound well before the economy does. Let’s hope history repeats itself.

Thank you for your continuing confidence.