The last few years have been brutal for first-time homebuyers. Prices have been trending higher for the last decade and accelerated in the post-pandemic period. The last couple of years have also seen affordability take a huge hit due to interest rates making mortgages more expensive, a consequence of the Fed’s battle against inflation.

Further despite many headwinds, home prices have remained flat rather than go down and provide relief to buyers. This was, in part, due to low supply as many homeowners elected to hold onto their homes and low monthly payments rather than move. However, there are some signs of positive developments.

The major one is the Fed pivoting and starting to cut rates which is expected sometime in May or June. One caveat is that declines in the mortgage rate in the summer and winter of last year led to sizable jumps in mortgage applications, indicating a healthy amount of pent-up demand if conditions ease. This means that any relief could be short-lived as prices could resume rising if activity picks up. In the interim, one group of winners could be cash buyers given that there could be some forced sellers who are unable or unwilling to refinance at higher rates. 

Finsum: The sharp rise in home prices in the post-pandemic period and spike in interest rates has been brutal for prospective home buyers who have seen affordability crumble. Here’s why 2024 could present more favorable conditions. 

Entering the year, there was considerable optimism that the Fed could begin cutting rates as soon as March. However, the February FOMC meeting, recent inflation data, and the January jobs report have made it clear that the status quo of a data-dependent Fed, prevails. It’s clear that the Fed’s next move is to cut, but timing is the mystery.

This state of affairs means that the window for bond investors, seeking value, remains open. While recent developments have been bearish for bonds, investors have a chance to take advantage of higher yields if they are willing to live through near-term volatility. This is especially if they believe the Fed will cut rates later this year which will lift the whole asset class higher. 

According to Bloomberg, “The US economy is testing bond traders’ faith that the Federal Reserve will deliver a series of interest-rate cuts this year.” Investors can buy the dip with a broad bond fund like the Vanguard Total Bond Market Index Fund ETF, or they can search for more yield by taking on more credit risk with the Vanguard Short-Term Corporate Bond Index Fund ETF. Both have low expense ratios at 0.04% and 0.03%, respectively, and have dividend yields of 3.2%.  

Finsum: Bonds are experiencing a bout of weakness due to uncertainty about the timing and extent of the Fed’s rate cuts. Here’s why investors should consider buying the dip. 

Artificial Intelligence (AI) is disrupting how businesses operate in multiple ways. Advisors should embrace this technology, because it can help create more efficiency by handling routine tasks, freeing up more time and energy for high-value tasks. It can be particularly valuable in terms of managing the practice.

Some considerations include figuring out which parts of the business can be enhanced with AI and which should remain in the purview of an advisor. Another is that proper training in these tools is necessary in order to ensure that they are being properly used. 

An example of how the technology is already being leveraged to improve practice management is through the use of AI note-taking applications. Prior to this, advisors (or a staff member) would take notes during the meeting which can be distracting and detract from cultivating engagement. These apps can essentially transcribe and summarize the conversation which means advisors can stay in the moment and give full attention to the client.

Then, these summaries and notes from client interactions can be integrated into the customer relationship management (CRM) software. Thus, these notes can be used by the practice to provide a richer experience for clients by methodically following up on all relevant matters. AI can also help discover insights and identify action steps that need to be taken. 

Finsum: AI is the latest disruptive technology that will certainly impact multiple aspects of an advisors’ practice. Here is how it can be used to improve a practice’s operations. 

In 2023, yields started where they ended, although there was considerable volatility in between. Notably, yields dropped sharply following the collapse of Silicon Valley Bank in the spring amid concerns that it would spark a greater crisis. And, yields spiked in autumn with the 10-year Treasury yield exceeding 5% following an uptick in inflation.

In hindsight, this marked the bottom for fixed income as the Bloomberg U.S. Aggregate Index gained nearly 10% between the end of October and the new year. Looking ahead, Vanguard believes this strong performance will continue in 2024. 

In terms of its outlook, it sees inflation ending the year just above the Fed’s 2% target. It believes the Fed will ease policy, although they don’t see rates returning to the same lows as the previous cycle. It also sees the yield curve steepening as short-term rates fall further. 

The firm also acknowledges some risks to its outlook such as the economy continuing to be bumpy even within the context of a slowdown which could lead to false signals. Credit spreads have remained tight which means that there is greater risk in the event of a recession. High deficits mean that Treasury supply will be plentiful, adding upwards pressure to yields. Finally, inflation could re-ignite especially given geopolitical risks and prevent the Fed from easing even if the economy warranted it. 

Finsum: Many active fixed income funds are being launched with a specialized focus on a particular niche. These funds have outperformed amid the volatility in the fixed income market. 

The US economy added 353,000 jobs in January which was well above analysts’ consensus estimate of a 185,000 increase. The positive news for the labor market continued as the November and December reports were also revised higher by a cumulative amount of 126,000. Average hourly earnings also surprised to the upside, coming in at 0.6% monthly and 4.6% annually vs expectations of 0.3% and 4.1%, respectively.

In response, stocks rallied, while bonds declined. The yield on the 10-year Treasury jumped 15 basis points with the curve slightly inverting as short-term Treasuries saw steeper losses. This isn’t too surprising as the strong labor market reduces concerns that the Fed is risking a recession by not cutting soon enough. Additionally, the central bank also pays close attention to wages as a major input into its inflation forecast.

Thus for fixed income, the report was negative in two ways. It implies that ‘higher for longer’ remains the status quo in terms of monetary policy especially as this was also the major takeaway from the recent FOMC meeting. The Fed’s stance would change if there was a sudden deterioration in economic conditions, or if inflation continues to move lower. The report makes it clear that neither scenario is close to fruition which means that this period of data-dependency and ‘higher for longer’ will continue.  

Finsum: The January jobs report blew past expectations in terms of jobs added and wages. In response, bonds dropped as the results reduce the odds of the Fed cutting rates at upcoming meetings.