The Federal Reserve raised short-term interest rates which was expected by market watchers. The quarter-point percentage increase brings the Fed Funds rate to a target range of 5.25% - 5.50%. In his comments, Fed Chair Jerome Powell said that inflation has moderated but there is a long way to go to reach the Federal Reserve’s inflation target of 2%. He also said future moves by the central bank will be data-dependent but many market analysts believe this was the last rate hike. The next rate decision meeting for the Fed is scheduled for September 19-20. CNBC WSJ
The Long and Variable Lag Phenomenon of Fed Rate Hikes: One of the challenges of the Federal Reserve is determining the lag effect of rate hikes on the economy. Economic instruments can adjust quickly to changes in short-term interest rates, such as mortgages and new credit lending. But how that flows through to the overall economy takes time. For example, companies that borrow in the debt markets issue bonds over different periods with maturities ranging from one month to 30 years. As bonds mature, companies will be paying a lot more interest now than in the past which could affect profitability, hiring, purchasing, capital expenditures, etc. I use public companies as an example, but higher rates will also affect other entities that use debt such as governments and consumers. There are different opinions among economists on how long the economic lag-effect is from Fed rate changes (not a new concept as the old joke goes “If you laid every economist in the world end to end they couldn’t reach a conclusion”). But most economists seem to agree Fed rate changes take from 9 months to two years to reach their full economic effect. This means the rate hikes could take until the end of next year (or longer) to work their way through the economy. Now that we may have seen a peak in short-term rates, we will have to see how it affects the economy in the coming quarters. St. Louis Federal Reserve Bank
Financial Planning/Investment Strategy Corner:
International Diversification: We have written from time to time about diversifying portfolios. Diversification aims to smooth out returns and participate in growth in multiple areas. U.S. stocks have outperformed their internationally developed peers since January 2008 by a wide margin. Up until the end of May, the S&P 500 Index has returned 9.2% annually while the corresponding international developed country index, the MSCI EAFE Index, has returned only 2.7% annually. So, making the argument that investors should have exposure to international companies and markets is not always easy because of recent returns. Recency bias in human behavior plays a big role. Recency bias is a memory bias that favors recent events over historic ones, basically giving more credibility to what has happened in the near term and discounting what has happened long term.
When it comes to investing internationally, it is hard to look beyond the recent underperformance. But that argument was not hard to make in January of 2008. In the eight years prior to 2008, the S&P 500 Index returned 1.7% annually, while the MSCI EAFE Index returned 5.6% annually. Looking further back the from 1970 to 2008, the international index outperformed by .5% annually, which may not sound like much, but it adds up after almost 4 decades! U.S. and international stocks have gone back and forth as to which markets performed better over the decades. It is impossible to know when or if a market is about to have a long run of great performance, hence the saying, past performance is not a guarantee of future returns. But staying invested in international markets is a prudent strategy for long-term investors. Kitces.com Wikipedia – Recency Bias
Quick Hits:
- Tips for sleeping better at every stage of life: NYT
- Bird sounds help reduce stress and anxiety - chirp, chirp! WSJ Science Direct
- A Google data center will be powered by geothermal energy because of a technological breakthrough. The new technique may be used to soon power 25% of Utah homes: Engadget
- For you hikers out there, here are 25 waterfalls to hike in Maine this summer: DownEast
- Use this technique by Hemingway to turbocharge your morning productivity: Inc.
- Taking a vacation from your workout may make you more fit: WSJ
Cruising the Casco: Our Portland summer cruise event is coming up on Thursday, August 17th at 5:00 PM. This event was one of the most popular events we did pre-pandemic which is why we brought it back. Invites have gone out, but if you didn’t receive one and want to go, reach out to us. So, bring your Jimmy Buffet attitude, sunblock, and shades, and join us on the water!
The Case for Longer Vacations: Research has consistently demonstrated the benefits of longer vacations on individual well-being and overall productivity. Studies found that employees who took vacations lasting two weeks or more reported reduced stress levels, increased job satisfaction, and enhanced creativity upon returning to work along with higher life satisfaction and improved mental health. Furthermore, research has indicated that individuals who took longer vacations had a lower risk of heart disease and improved cardiovascular health. So get out there and take a long break!
Condé Nast Traveler Science Daily Cleveland HeartLab
Delft Netherlands: I finally listened to the research and went on a two-week vacation for the first time. The whole family joined, and we went to Amsterdam, Brussels, and other parts of the Netherlands. One small town that was not on our radar until we researched the trip was the town of Delft, Netherlands. What a fantastic town! It has an old square with a town hall (pictured below) along with a church containing the remains of the Orange royal family. The town has a lot of history, and canals just like Amsterdam, but very quaint with fewer crowds and tourists than more well-known spots. We have read it is where people from the Netherlands vacation and I would highly recommend stopping in for a day or two if you are ever in the area. BTW, the two-week break was great! 😊
The Legendary Tony Bennett Passes: I was sad to hear about the passing of Tony Bennett. He was a true gentleman and an exceptionally talented crooner. Upon hearing the news, I fondly recalled the only time I was privileged to have seen him sing live. On the first anniversary of the opening of the RSWA Portsmouth office, as a thank-you for their support, I took some clients and friends of the firm to see Tony sing at the Portsmouth Music Hall. We had an incredible time, and he was amazing. In his memory, I leave you this week with a video of one of his duets with Lady Gaga. Enjoy, and rest in peace, Tony. YouTube: Tony Bennett, Lady Gaga – I Get A Kick Out of You
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