With inflation picking up again and highly anticipated Federal Reserve interest rate cuts delayed, it may be a good time for Americans to tweak their investment and retirement portfolios, financial advisers say.
While U.S. rate cuts are on hold, the European Central Bank (ECB) suggested last week that its first rate cut could come in June. Though Europe’s economy is anemic compared to the U.S., those rate cuts could ignite more stock market growth that would benefit investors, advisers say. On the flipside, high U.S. rates could make U.S. fixed income a better investment.
“It’s an excellent time to buy U.S. bonds with yields near the highest levels since October 2023,” said James Sahagian, managing director of Ramapo Wealth Advisors at Steward Partners. “I also think it’s worthwhile to diversify outside of the U.S.”
Europe’s stock market is already on the rise
The Eurostoxx 50, comprised of European blue-chip stocks, is outperforming its U.S. counterpart, the Dow Jones Industrial Average. As of Tuesday, Eurostoxx 50’s one-year return is 15.77% and its year-to-date gain is 8.75%, according to Bloomberg. That compares to the Dow’s 13.91% and 0.29%, respectively.
Protect your assets: Best high-yield savings accounts of 2023
“In Europe, their economy’s starting to expand a little and (the ECB) can aid that by reducing rates a little,” said Derek Miser, investment advisor and chief executive at Miser Wealth Partners.
Europe has room to lower rates because “unlike in the United States, there is little evidence of overheating” to resurrect inflation, wrote Pierre-Olivier Gourinchas, economic counsellor and director of research at the International Monetary Fund (IMF) in a blog post about the IMF’s World Economic Outlook report released Tuesday.
The IMF also predicts Europe’s economy will expand, registering 1.5% growth by 2025, but U.S. growth will gradually slow to 1.9%.
How do lower rates help the economy?
Central banks often lower interest rates to jumpstart lackluster economies, as long as inflation is contained. Lower rates mean lower borrowing costs, which encourage people to spend and companies to invest. That, in turn, boosts corporate profits, production, output and the overall economy.
The opposite is true if central banks raise rates. Higher rates increase borrowing costs, which discourages spending and investing to slow down a hot economy and inflation. They also encourage saving because people can earn a higher return on their money.
Valuations
After a string of record highs for U.S. stocks, some financial advisers see the market as overextended compared with European stocks.
“European companies are considerably more attractive based on valuations,” Sahagian said. “That merits more consideration.”
At the end of March, Europe’s STOXX 600 index traded at about 15 times its one-year forward price-to-earnings (PE) ratio, while its U.S. counterpart S&P 500 index traded at 26 times, according to LSEG data. A lower PE multiple indicates a more attractive investment opportunity.
Bank of America’s global fund manager survey last month showed the largest allocation increase to European Union stocks since June 2020.
Stick with U.S. Treasuries
If U.S. rates are going to stay higher for longer now, investors should keep their Treasuries, which are yielding around 5%, advisers said.
It will also add some stability to your portfolio because it’s steady income, Miser said.
The secret’s out:The 3 secrets of 401(k) millionaires
What should my 401(k) look like if I take these steps?
Your allocation of stocks and bonds should always depend on your risk tolerance and how close you are to retirement, advisers say. The higher your risk tolerance or further away from retirement, the heavier the equity weighting, they say.
After you’ve decided your stock and bond allocation, you might consider taking 20% of whatever your equity position is and allocate it to a global investment fund, Miser said.
In the fixed-income portion of your portfolio, Sahagian likes the “barbell,” which means investing in short-term and long-term bonds. You gain from the high short-term interest rates while also locking in some decent long-term returns in case rates begin to fall.
Miser likes 40% in two- to five-year notes, 30% in 5- to 10-years and then the rest in 30-year bonds. The varying maturities give you the flexibility to reinvest money at various times and in various ways, including buying new Treasuries.
But with all retirement investments, consumers should consider what stage they are in life and what their goals and risk tolerance are before making moves, advisers said.
Are Costco gold bars a good investment?
Gold prices are near an all-time high around $2.400 per ounce, reflecting a “crisis of confidence,” Sahagian said. “People are looking at other assets that will hold up in the wake of uncertainties and upheaval.” They’re dissatisfied with government and monetary policy after the highest inflation in four decades and concurrent wars in Ukraine and Palestine, advisers said.
“Costco’s a trusted source (for buying things, including gold bars), and people are searching for alternative ways to invest,” Sahagian said. “Most cultures around the world value gold, like in India and Africa. So is it a good idea and liquid? Yes, you can monetize it at some point.”
Miser’s not so sure.
“Gold may have been a good idea 3-1/2 to 4 years ago when you could buy low and sell high,” he said. “That’s the opposite of buying gold now. Today, you’re buying at the highest it’s been in a long time, which typically means prices are reaching near their end.”
Costco gold bars may be better left as a novelty purchase, he said.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
One of Americans’ biggest pet peeves – high inflation – seemed to be in retreat the past few months but the latest report revealed an unwelcome flare-up in January. Will a lesser-known price measure that the Federal Reserve follows more closely deliver better news?
Consumer confidence, meanwhile, has been recovering from some inflation-induced blahs. Will the February report highlight more good vibes or another mood swing?
And home prices have been in the doldrums because of high mortgage rates — although borrowing costs have eased a bit lately. Could that bear fruit in the latest reading on home prices?
This week’s economic news should help answer those and other questions that matter to your wallet. Here’s a sneak peek:
Are companies spending money?
30,000-foot view: Companies have been cautious about buying more factory machines, computers and other equipment recently because of high interest rates that make borrowing more expensive.
Protect your assets: Best high-yield savings accounts of 2023
But new orders for such long-lasting goods rose in November and December. Businesses have been encouraged by fading recession fears and the Federal Reserve’s expected interest rate cuts later this year, says Nomura economist Aichi Amemiya.
He estimates a key measure that excludes aircraft and defense-related items – a proxy for business investment – will show flat or slightly higher purchases in January when the Commerce Department releases the data on Tuesday.
You should care because: More capital spending means more growth for the economy and, generally, more hiring. After all, new machines typically need workers to run them.
Are house prices in the US dropping?
For home sellers, the past six months or so have been frustrating.
30,000-foot view: Monthly increases in home prices have steadily slowed since the middle of last year as rising mortgage rates discouraged housing sales. In November, the average home price in major metro areas fell for the first time in 10 months (before seasonal adjustments), according to the S&P CoreLogic Case-Shiller Home Price Index of 20 cities.
Nomura expects more of the same in S&P’s release of the December figures on Tuesday.
You should care because: Mortgage rates generally have dipped since late last year and that should lift home sales and prices in the months ahead, Nomura says.
Is consumer confidence high right now?
Americans have been feeling better about their finances and the economy lately but that could change quickly if the outlook darkens.
30,000-foot view: In January, consumer confidence reached the highest level since late 2021 on easing inflation, strong job growth, rising stock prices and the prospect of lower interest rates. Economists surveyed by Bloomberg estimate the Conference Board will announce Tuesday that confidence held steady in February while Nomura expects a slight uptick.
You should care because: The measure affects household spending and the economy.
Is US inflation cooling down?
Inflation seemed to be on a steady downward path until the Labor Department’s consumer price index (CPI) raised concerns earlier this month.
A core measure of the CPI, which excludes volatile food and energy items, rose a sharp 0.4% in January, keeping the annual increase at 3.9%. That led some economists to push out their forecast for the Federal Reserve’s first interest rate cut from May to a bit later this year.
30,000-foot view: On Thursday, the Commerce Department releases a different inflation gauge called the personal consumption expenditures (PCE) price index. The Fed keeps a closer eye on the core PCE index than the core CPI and economists expect a similar 0.4% rise in that PCE reading as another jump in rent as well as services such as health care, finance and insurance offsets roughly flat goods prices, Barclays says.
You should care because: That rise would be the largest monthly increase in a year, Nomura notes, but would still nudge down the annual increase from 2.9% to 2.8%, a bit closer to the Fed’s 2% goal. And economists still expect inflation to continue to drop in the coming months as rent increases slow.
The PCE report is also expected to show that consumer spending increased a modest 0.2% last month, well below December’s 0.7% leap.
Is US manufacturing in a recession?
The economy has been strong and resilient. But the nation’s manufacturers have barely felt it.
30,000-foot view: U.S. manufacturing activity has contracted for 15 straight months as consumers have shifted their spending from goods to services since the pandemic and businesses have grappled with high interest rates and bloated inventories.
You should care because: On Friday, the Institute for Supply Management is expected to announce that factory activity shrank yet again in February but the total activity level – which includes new orders, production, jobs and other elements – was likely the highest since October 2022. Nomura anticipates an even bigger improvement to just below expansion territory.