The Slow Burn


This week, the Federal Reserve raised interest rates another .25% in its battle against inflation. In the weeks, and then ultimately days (in light of banking turmoil), leading up to the announcement, everyone everywhere seemed to take it upon themselves to offer Fed Chair Jerome Powell their own version of advice. And there were pretty sound arguments on both sides of the debate. Ultimately, the Fed did what we thought it would do—continue on its path of rate increases, albeit slower than what felt likely even just a few weeks prior (.50%).

Man jogging up stairs in forest

Regardless of how you might feel about the Fed’s decision to hike for the 9th (!!) time in one year, our interpretation is this: The Fed has been saying on repeat that it intends to keep rates higher for longer. It has said for months that inflation is still running too hot, employment still too strong, for it to even think about pausing its tightening cycle, let alone cutting rates. As concerns about the banking system took center stage in March, people (as in, everyone except for the Fed itself) started pontificating publicly about what impact it would/should have on the Fed’s action plan. Well, if we know anything about Jay Powell’s central bank leadership style, it’s that he likes to avoid surprises wherever possible. He’s learned (from the mistakes of others) that Fed action itself is enough to change the trajectory of the economy, so why add to that any whipsawing cacophony of shock, surprise, and other emotional sentiments if it can possibly be avoided? Suffice it to say, one of Powell’s strong suits has been his ability to keep solid control over the narrative, and to hike another .25% (maintain status quo and continue on the path he’d been all but pounding the table about for months) was clearly the more narrative-controlled option at this stage of the game. A pivot in the rate hike cycle, seen as crucial by some to stem further bank runs (depositors speedily pulling their money out of banks for liquidity or solvency concerns), would have opened itself up to endless interpretation—including by Chicken Little himself, wondering if the sky is in fact falling if banking contagion concerns are valid enough for the Fed to set aside its dual mandate and try to curb it. So, here we are, with the fed funds rate at 5% (it was near zero at the beginning of last March), some hinting from the Fed that it may be the last hike for a while, and the market yet again sorting out what to make of it.

The last year has played mind games with many investors. There has been a feeling among some that we are approaching the end of the current cycle, and that we are headed into a recession at some point in the foreseeable future, although no one knows when. Some of the key leading economic indicators would support that notion—what started with an inversion in the yield curve (which still remains inverted) has been compounded by other fundamental weakness in the form of manufacturing data and the state of the consumer in terms of balance sheets running thinner and healthy savings rates being eroded away. And while employment, arguably a beacon to people when it comes to staving off a recession, has been more resilient than anyone would have predicted, there are cracks in certain industries that have at a minimum had a psychological effect on investors. And lastly, the stock market needs mentioning. The stock market first fell into Bear Market territory in June of 2022, down over 20%, and then eventually bottomed in October, down 25%. It finished the year higher, and has made gains in 2023 as well, but the psychological experience has felt, well, not great. We’re many, many volatile trading days into a season that for some investors has been one of dread—wanting so badly to know when the darkest hour will come, and even more importantly maybe, when we’ll know the darkest hour is behind us and we’re on our way out. People are getting tired of asking these questions; they’re getting tired of the waiting game. The volatility of 2023 so far, although positive for the year, has been tough for many to experience day in and day out—especially with the backdrop of tough headlines and what feels like an enormously difficult burden carried by the Fed in attempting to stick the soft landing. Such volatility has a slow burn effect—the kind of psychological conundrum or disconcertion that causes some investors to ask, Wait, what are Money Markets yielding right now? What exactly is the point of withstanding all of this volatility again? 

Howe & Rusling is here to remind you, as many times as you need to hear it, what the point of all of this is.

Growth of $10,000 Over Time

Cumulative Percentage Change Over Time

The dark navy lines above are a good proxy for Money Market Funds, the chartreuse lines a proxy for the stock market, and the blue line in the second chart a representation of the inflation rate. I wish I could pause for dramatic effect—because this is the point of it all. During all of those tiny valleys and troughs (and recessions marked by the gray vertical bars), I can imagine, even feel in my bones, the irresistible allure of the stability of cash or cash equivalents. To quote one of my clients, there’s just something about the tangibility of the value of cash (especially when cash is basically paying 4.5% right now); there’s just something about avoiding the erosion of value in hard-earned money day in and day out. And there’s just something a little too intangible about the promise of future returns. We get it, we really do. But let these charts sink in. The allure of cash feels good and safe in the moment, but a wider aperture reveals that moment to be a tiny blip that changes the trajectory of your returns forever, or worse yet—can become your charted path forever, and 30 years later you’ve had ZERO (0) real growth or real return after accounting for inflation.

The other critical risk to putting too many eggs in the “cash” or Money Market basket is that, sure, cash doesn’t have any risk associated with loss of principle, but it has reinvestment risk. What do I mean by this? I mean that while cash may feel like an appealing option right now while volatility makes the stock and bond markets feel less viable, this will not always be the case, and getting back into those markets is not only very difficult to do, emotionally, but it is also a really difficult thing to time. What happens when your money is no longer earning 4.5% in the Money Market, and you have no choice but to search for yield elsewhere? What event will occur that tells you it is time to move into the stock or bond market? And where will you find the courage at that point to actually make the jump? Cash serves a purpose, and it is an asset class to be used wisely. However, it is not a viable investment option for a large part of your portfolio for the long term. The same is true for Money Market funds. They are a tremendous alternative to savings accounts, but they are merely that—an alternative to savings accounts, not an alternative to investments.

As we’ve said before—and I know it never gets any easier to accept—no one knows what the future will bring. That is the nature of investing; it is inherently a game of risk and reward. If there were total control and omniscience, we couldn’t be handsomely rewarded for our ability to accept the risk. But consider this: to my knowledge, it’s the only game of risk, the only kind of “gambling” where you can trust you’ll come out on top. All you have to do is keep your seat at the table, and you’ll end up being glad that you played the game.

The idiomatic phrase, rip the Band-Aid off, means to quickly do something painful or unpleasant so that the discomfort is short-lived.  While the pain may be more intense, it’s fast and over-with quickly. And there is a mental component to it, as well. There is light at the end of the very short tunnel, and that makes withstanding the pain easier. In the investing world, a quick and disastrous market downturn is the equivalent of the Band-Aid analogy. It is unbelievably painful to experience a market decline of over 30% in a matter of days like we saw at the start of the Covid pandemic—but we find that people have an easier time hanging on because there is a sense of, How much worse could this possibly get? There is only one way to really go, and that is up. Quick, intense pain—but the mental presumption is that it will be over soon. If you switch gears and imagine more of a slow burn and less of a Band-Aid scenario, the mental and emotional impacts are exhausting and taxing. If you have to dwell on something and dread its eventual arrival, the slow burn makes it difficult to see the light at the end of the tunnel; it becomes difficult to see how far you’ve come or how much farther you have to go. That is a very challenging thing for the human spirit to endure. While the last year has at many times felt like a slow burn, we urge you to remember the psychological side to investing. We urge you to stay the course and accept the discomfort that is uncertainty. We urge you to sit with that discomfort and recognize what it is; it is the price you pay in the short term for long-term reward.

Sarah Swan

As a Wealth Manager and CERTIFIED FINANCIAL PLANNER™, Sarah focuses her time on working with clients and is passionate about helping them achieve their financial goals


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