Financial Advisors Turn Cautious in Response to Fed’s Jackson Hole Meeting

Advisors scramble to make the most of bond yields while hoping for the best with stocks.

With reports coming out of the Fed’s annual symposium in Jackson Hole, Wyoming suggesting higher interest rates are here to stay, financial advisors are zeroing in on various strategies to help investors make the most of the new reality. 

Laura Lynch, founder of The Tiny House Adviser, said just like the stock market rallies of the past have been “subsidized” by lower interest rates, the higher rates will “temper the growth of publicly traded companies.” 

“This, coupled with the fact that bonds and stocks are historically more correlated in inflationary environments, which was felt acutely in client portfolios in 2022, has caused me to look outside the standard 60/40 portfolio for assets offering more diversification,” she said.  

“I have curated three investment themes for my clients based on this outlook for the future, one of which brings in a noncorrelated strategy and some tail hedge in an effort to reduce the compounding of negative returns and improve behavioral responses to future markets,” Lynch added. 

For Brandon Welch, a financial advisor at Newport Wealth Advisors, the upside of consistently higher rates means “we can finally celebrate earning a reasonable yield on the fixed income portion of our allocation, while proceeding cautiously with equities.” 

“If rates stay higher for longer, I like the idea of building shorter-term bond ladders to take advantage of higher interest rates on shorter duration bonds,” he said. “For retirees, this may also be a good time to reduce risk in the portfolio by moving more assets to bonds.” 

Meanwhile, on the equity side, where the SPDR S&P 500 ETF Trust (SPY) is riding a 15% gain this year, Welch said, “we still have yet to see the long-term impact of persistently higher rates.” 

“These rates could cause a decline in stock valuations,” he added. “I prefer to proceed with caution by focusing on profitable high quality companies that produce strong cash flow and have low leverage.” 

Bond Yield Challenge 

Paul Schatz, president of Heritage Capital, said he has been jockeying for a solid position in fixed income since the start of the year, when he was bullish and wrong on bonds.  

“To make matters more challenging, the yield curve remained deeply inverted, so it hasn’t been so easy to just lock in yields [with longer-term bonds] when shorter-term paper was offering significantly higher yields,” he said.  

Similar to Welch, Schatz has been laddering short-term Treasury notes for clients with near-term liabilities. For other clients, he is laddering investment grade bonds. 

One thing he isn’t doing is buying “the plain vanilla total return bond funds because of the loss of principal.”  

“For clients who can tolerate more risk, I have been blending in preferred stocks, convertible bonds and a range of higher-paying dividend stocks in energy, telecom, REITs, industrials and a few special situations like IBM,” Schatz added. 

Investing based on the anticipated direction of the Federal Reserve’s monetary policy is always tricky, but Jack McIntyre, portfolio manager at Brandywine Global, did his best to read between the lines of what’s unfolding in Jackson Hole. 

“The Fed is OK with the recent wobbliness in the equity market, as it will tighten financial conditions more than another rate hike,” he said. “We are not making changes to our fixed income portfolios based on this [latest Fed] speech.” 

That’s essentially where The Wealthy Parent founder and Chief Wealth Officer Kelly Palmer is with her clients. 

“I’m avoiding making any changes to client allocation recommendations,” she said. “If clients are investing for their goals more than a few years away, they just need to hang on tight and ignore the noise. Higher rates certainly come into play when my clients look to purchase a new home, and in those cases, I ensure we have significant space in the budget for a higher mortgage payment for the foreseeable future.” 

Contact Jeff Benjamin at @[email protected]