As of May 8, 2023
History has shown that when the Federal Reserve (Fed) raises rates, something often breaks. This cycle, we saw the impact on the banking industry with the failures of Silicon Valley Bank and Signature Bank in March and First Republic Bank in May. At their most recent meeting, Fed Chair Jerome Powell gave some indication they may now pause on rate hikes to give the economy a chance to respond.
Our economic models at Thrivent show a higher probability of a recession later in 2023. We believe a recession would be mild, particularly as employment numbers remain strong and households still have significant accumulated savings. Unemployment, however, normally doesn’t rise significantly until the economy enters a recession. We see the market potentially looking through a mild recession, as earnings forecasts are lower in the second and third quarters but higher toward the end of 2023 and into 2024.
As the Fed has hiked short-term rates, rates have increased for money market funds and bank Certificates of Deposit (CDs). While these vehicles may protect against a rise in interest rates in the near term (bonds decline in value as rates increase), it introduces a different kind of risk, called “reinvestment risk.” Eventually, you’ll need to reinvest that money and will run the risk of reinvesting during a slower economy with potentially lower rates. To help mitigate this, you may want to consider investment options that lock in the longer-term rates we’re seeing currently, which are the highest we’ve had in over a decade.
Now is a particularly important time to meet with your financial advisor so you can consider your overall stock and bond allocation. We believe stocks, especially smaller companies, could rally as the economy bottoms, but this also could be a time to lock in attractive longer-term interest rates. Your financial advisor can offer advice on what makes sense based on your personal situation so you can accomplish your goals.
