Atlantic Capital Management

Atlantic Capital Management (105)

Thursday, 19 June 2014 00:00

Rising Interest Rates

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How might they affect investments, housing & retirees?

How will Wall Street fare if interest rates climb back to historic norms? Rising interest rates could certainly impact investments, the real estate market and the overall economy – but their influence might not be as negative as some perceive.  

Why are rates rising? You can cite three factors. The Federal Reserve is gradually reducing its monthly asset purchases. As that has happened, inflation expectations have grown, and perception can often become reality on Main Street and Wall Street. In addition, the economy has gained momentum, and interest rates tend to rise in better times.

The federal funds rate has been in the 0.0%-0.25% range since December 2008. Historically, it has averaged about 4%. It was at 4.25% when the recession hit in late 2007. Short-term fluctuations have also been the norm for the key interest rate. It was at 1.00% in June 2003 compared to 6.5% in May 2000. In December 1991, it was at 4.00% – but just 17 months earlier, it had been at 8.00%. Rates will rise, fall and rise again; what may happen as they rise?1,2

The effect on investments. Last September, an investment strategist named Rob Brown wrote an article for Financial Advisor Magazine noting how well stocks have performed as rates rise. Brown studied the 30 economic expansions that have occurred in the United States since 1865 (excepting our current one). He pinpointed a 10-month window within each expansion that saw the greatest gains in interest rates (referencing then-current yields on the 10-year Treasury). The median return on the S&P 500 for all of these 10-month windows was 7.93% and the index returned positive in 80% of these 10-month periods. Looking at such 10-month windows since 1919, the S&P’s median return was even better at 11.50% – and the index gained in 81% of said intervals.3 

Lastly, Brown looked at the S&P 500’s return in the 12-month periods ending on October 31, 1994 and May 31, 2004. In the first 12-month stretch, the interest rate on the 10-year note rose 2.38% to 7.81% while the S&P gained only 3.87%. Across the 12 months ending on May 31, 2004, however, the index rose 18.33% even as the 10-year Treasury yield rose 1.29% to 4.66%.3  

The effect on the housing market. Do costlier mortgages discourage home sales? Recent data backs up that presumption. Existing home sales were up 1.3% for April, but that was the first monthly gain recorded by the National Association of Realtors for 2014. Year-over-year, the decline was 6.8%. On the other hand, when the economy improves the labor market typically improves as well, and more hiring means less unemployment. Unemployment is an impediment to home sales; lessen it, and more homes might move even as mortgages grow more expensive.4 

When the economy is well, home prices have every reason to appreciate even if interest rates go up. NAR says the median sale price of an existing home rose 5.2% in the past year – not the double-digit appreciation seen in 2013, but not bad. Cash buyers don’t care about interest rates, and according to RealtyTrac, 43% of buyers in Q1 bought without mortgages.4,5

Rates might not climb as fast as some think. Federal Reserve Bank of New York President William Dudley – whose voting in Fed policy meetings tends to correspond with that of Janet Yellen – thinks that the federal funds rate will stay below its historic average for some time. Why? In a May 20 speech, he noted three reasons. One, baby boomers are retiring, which implies less potential for economic growth across the next decade. Two, banks are asked to keep higher capital ratios these days, and that implies lower bank profits and less lending as more money is being held in reserves. Three, he believes households and businesses are still traumatized by the memory of the Great Recession. Many are reluctant to invest and spend, especially with college loan debt so endemic and the housing sector possibly cooling off.6  

Emerging markets in particular may have been soothed by recent comments from Dudley and other Fed officials. They have seen less volatility this spring than in previous months, and the MSCI Emerging Markets index has outperformed the S&P 500 so far this year.2    

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.



1 - [5/22/14]

2 - [5/21/14]

3 - [9/17/13]

4 - [5/22/14]

5 - [5/8/14]  

6 - [5/20/14]

Thursday, 05 June 2014 00:00

Milestones for Rebalancing a Portfolio

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If you’re a regular reader, you know that we strongly encourage DIY investors to allocate the assets in their portfolios to reflect both breadth across markets and depth within markets. This is the strategy we use when investing on behalf of our own clients, and we have found that it offers a good balance of driving growth while minimizing volatility – one of the many risk management techniques we employ at Atlantic Capital Management.

Market dynamics being what they are, however, it’s important to regularly evaluate the structure of a portfolio and rebalance the asset allocation to take life and market changes into account. For example, emerging markets have been sliding over the past 6 months, warranting a hard look at what portion of your portfolio should be invested in that area, if any. Similarly, life changes, like pending retirement or buying a home, that impact the time horizon of your expected returns should also drive examination of your portfolio and/or adjusting your risk tolerance.

Following are a couple of milestones you can use for gauging whether it’s time to look at rebalancing the mix of assets or investment products that make up your portfolio:

Risk Tolerance and Time Horizon: If you find that your time horizon has been shortened by a life event or other unplanned-for situation, you will have to include some evaluation of your appetite for risk into the rebalancing equation. Investors with relatively stable, long-term goals can rebalance less often than investors who need more flexibility and liquidity. Undertaking a rebalancing should always begin with an honest assessment of your tolerance for risk.

Tax Status: Rebalancing a portfolio sometimes involves selling off portions of it, particularly equities. This, unfortunately, makes you subject to capital gains taxes in most cases. If your portfolio is heavily invested in taxable accounts, resist the urge to frequently rebalance unless you can stomach the tax consequences that come with it. The opposite is true if most of your investments are held in tax-sheltered accounts. It’s a good idea to consult a tax professional to understand the implications before moving a lot of money in and out of taxable accounts.

Transaction Costs: In general, most savvy investors aim for the lowest possible transaction costs, both in long-term and short-term scenarios. Paying a broker or advisor who takes a commission on the sale of assets makes frequent rebalancing less appealing, for many of the same reasons related to tax status. Even if you buy and sell on your own, pay attention to the overall transaction costs you incur when moving in and out of asset classes. Those fees can really add up and eat into your gains over the long-term. Try to avoid the double-whammy of taxes AND transaction costs by rebalancing only when it’s favorable.  Studies have shown that barring any major change in personal or financial circumstances, yearly rebalance is sufficient.

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