Chief Investment Officer | Johnson Financial Group
As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy to provide consistent, actionable investment solutions for our clients.
4 minute read time
I recently acquired an app for my Apple iPhone and iPad called Swing Vision to help my son up his tennis game. It is an amazing little tool that turns your Apple device into an analytical tool for tennis. Using the phone’s camera it will record video of the match, keep score, show where each shot lands, and calculate the percentage of shots that are in, deep, number of rallies above eight shots, number of shots in longest rally, average shot speed, number of forehands/backhands that land in…you get the idea. After a match, it is a lot of data.
My son is less interested in the data than processing the outcome of the match. After a recent match, he queried: “How much information is too much?”
As an investor, I find myself asking that question almost every day. You can’t—and shouldn’t—take action on every scrap of data. We have to choose the information that helps us make the best long-term investment.
Last week Federal Reserve Chairman Jerome Powell pointed to the same challenge. There’s no shortage of information available to the Fed. Yet in answering a question about potential future rate hikes, Powell said the Fed would continue to focus on inflation … and more data would be needed to determine the future path of rates.
At last week’s meeting, the Fed announced a Federal Funds rate increase of another quarter-percentage point, to target the 5.25%-5.50% range.
The market isn’t sure whether there will be more hikes, and the probability in the futures market is mixed. Our view is that whether rates go up another quarter point or three-quarters of a point, we know we are nearer the end of the hiking cycle. More important than the top level is how long will interest rates remain elevated.
While higher rates make it difficult for borrowers, as investors, we are glad to be buying bonds on behalf of clients with yields in the 5-7% range. For those willing to take on additional credit risk, higher yields are available.
Inflation isn’t just one number; it exists in different parts of the economy and is unique to each. Energy inflation, the price of oil and gasoline, isn’t the same as the inflation in the price of cardboard for a shipping company or the price of butter (have you seen the price of butter!) at the grocery store.
As a result, while inflation has come down in some areas it has been persistently high in others. This makes the Fed’s job more difficult and may lead to elevated interest rates for a longer period of time. Good news if you’re providing credit; not so much if you need it.
Because the outcome for interest rates is still uncertain, we like the idea of buying bonds with maturities in the middle of the yield curve, 3-7 years as an example.
In the day following the Fed’s meeting, we received a lot of new information about how the economy is performing.
All this new data suggests that we are experiencing the best of all possible worlds as investors. The economy is doing well enough to support corporate earnings growth and higher stock prices. Higher interest rates provide a better return on our bond portfolios and those higher rates haven’t cut into returns in other areas like real estate just yet.
“Just yet.” There’s the rub. Much of the good news we’re seeing is still an economic recovery from the negative effects of the pandemic. To the extent that these remain in place for longer, the Fed will be forced to keep rates high, and perhaps higher than they are today. Ultimately, we all bear the increased cost of debt. For government debt, that’s higher taxes; for corporate debt, that’s either lower profit margins or higher prices; for consumer debt, it’s a higher default rate when the labor market softens.
Just like that Swing Vision app, we have to analyze a lot of data, then choose the information that helps us make the best long-term investment decisions. We want to account for the plans of our clients, their time horizons and success before the analysis. Then, like watching my son play, sometimes you just have to enjoy the game.
This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank and Johnson Wealth Inc. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE