Displaying items by tag: fed

Wednesday, 10 January 2024 03:43

Client Concerns Around Fixed Income

It’s an interesting time for fixed income given the recent rally and optimism around inflation falling enough to cause a change in Fed policy. In conversations with clients, Nicholas Bragdon, Lord Abbet’s Associate Investment Strategist, discussed some common themes that are emerging. 

 

The first is that many clients report feeling satisfied with earning 5% returns in deposits and have no desire to make a change. While returns on cash are the highest in decades, the same is true across the fixed income universe even in short-duration assets like short-term corporate debt. Historical data also shows that being overweight in cash leads to long-term underperformance while also leading to reinvestment risk in the event that the Fed does start cutting rates. 

 

Another common concern among clients is that they believe they will have sufficient time to make changes to their portfolio if the Fed does start cutting rates. However, history shows that it’s quite difficult to time these changes in rate policy. 

 

In fact, last year at this time, the consensus was for the economy to fall into a recession in the second-half of the year, leading the Fed to start cutting rates. In reality, markets are too efficient and will have already priced in a bulk of gains by the time the Fed actually starts easing. Thus, investors should consider moving from cash or short-duration fixed income into intermediate or longer-duration to take advantage of the changing environment.


Finsum: Fixed income markets are at an interesting place, following a strong rally to end the year amid anticipation of a change in monetary policy. Here are some common client concerns. 

 

Published in Wealth Management
Wednesday, 10 January 2024 03:39

Home Sales to Increase in 2024: Zelman

Ivy Zelman is one of the top forecasters when it comes to the housing market. She’s made several prescient calls during her career including the housing bubble in 2006, the recovery in 2011, and recent pullback. She has been caught off guard by the resilience of home prices in 2023 despite a year of numerous challenges including high rates and a slowing economy.

 

For next year, she sees this strength continuing as affordability improves with falling rates, leading to a modest acceleration. She’s forecasting the 30-year fixed mortgage rate to fall to 6.4%, home sales growth to hit 5%, and prices to rise by 2%. In terms of the broader economy, her base case scenario is that current economic conditions prevail, and the Fed is successful in achieving a soft landing. 

 

While many are focused on the current low levels of housing inventory, Zelman notes that new construction is at the highest levels since 2007. She believes that large amounts of supply will be an issue in the long-term, leading to a glut. According to her, current demand estimates are based on an incorrect figure of 1.5 million units needed annually. Instead, she believes that slower population growth will translate to slower household growth, leading to lower levels of long-term demand. 


Finsum: Ivy Zelman is bullish on housing in 2024 due to falling rates and a better than expected economy. While the housing market is dealing with low levels of supply in the near-term, she believes that longer-term, excess supply is a concern.

 

Published in Eq: Real Estate
Tuesday, 09 January 2024 06:49

Annuity Sales Forecast to Be Strong in 2024

Annuity sales are expected to remain strong in the coming year on the heels of another record breaking year of sales in 2023. Whether 2024 sees another record year of sales ultimately depends on the economy and interest rates. Notably, the Life Insurance Marketing and Research Association (LIMRA) sees these favorable economic trends, such as volatility in financial markets and uncertainty about the economy and Fed policy, continuing. 

 

LIMRA notes that rates are likely to continue declining, which could also lead to a surge of sales as buyers may be eager to lock in rates at these levels. If financial markets continue to move higher, demand for products with lower risk like fixed indexed annuities and fixed-rate deferred annuities may decline while demand for registered indexed-linked annuities will climb. 

 

2023 was rare as nearly all categories saw growth. The highest rates in decades propelled sales of fixed annuities, while uncertainty around the economy and monetary policy drove growth for annuities offering downside protection. 

 

If the Fed does start to cut rates as anticipated, LIMRA projects that sales growth will eventually be impacted especially for more rate-sensitive products. In total, it forecasts sales between $311 billion and $331 billion depending on the trajectory of interest rates. 


Finsum: Annuity sales are forecast to remain strong in 2024. However, sales could slow when the Fed does actually start cutting rates as this would impact returns. 

 

Published in Wealth Management
Tuesday, 02 January 2024 15:59

Annuity Sales to Hit New Record in 2023

Annuity sales hit a new record high in 2023 at $360 billion which exceeded last year’s record of $311 billion. Experts attributed this to a combination of anxiety about stocks and the economy paired with the high interest rates in decades. 

 

Typically, annuity sales spike during periods of economic uncertainty. However, sales had been muted over the last decade due to the prevalence of ultra-low interest rates. This is evidenced by 2008 being the last year that annuity sales exceeded $250 billion prior to 2022. 

 

Currently, the majority of annuity sales are fixed-rate deferred annuities which pay an average of 4.5%. Prior to the Fed’s tightening campaign, this annuity paid 1.5%. In contrast, sales of single premium indexed annuities and deferred indexed annuities were much lower. 

 

These annuities are the simplest as the buyer hands over a lump sum in exchange for an income stream that lasts through their life. They are also the most effective in terms of hedging longevity risk for clients. However, there is a tradeoff in terms of liquidity and being unable to access the money once it’s put into the annuity. In contrast, fixed-rate deferred annuities do have more liquidity and offer higher rates but come with higher costs.


Finsum: Annuity sales hit a new record high in 2023 due to fears of a recession and inflation in addition to high interest rates. 

 

Published in Wealth Management
Tuesday, 02 January 2024 15:58

Upside Case for REITs in 2024

Rich Hill, the head of Real Estate Strategy at Cohen & Steers, shared his bullish outlook for REITs in 2024. He sees falling interest rates, tightening credit spreads, and undervaluation as the biggest catalysts for significant gains over the next year. However, he cautions that office REITs have their own dynamics due to vacancy rates remaining elevated amid the increase in remote and hybrid work.

 

REITs benefit in two ways from lower rates - their yields become more attractive to investors on a relative basis, and it leads to lower financing costs. Hill points to improving credit markets as another reason to overweight the sector in the coming year. This means REITs will have an easier time accessing credit which will lead to more activity such as acquisitions and new projects. Historically, REITs have outperformed during periods of tightening spreads and falling rates. 

 

Another attractive component of REITs is that valuations are compelling as prices have declined over the past couple of years, while earnings have remained quite stable due to the economy avoiding a recession. Further, most REITs continue to have a relatively low cost of capital due to refinancing at lower rates in 2021. 


Finsum: Rich Hill of Cohen & Steers is bullish on REITs for next year. He sees falling rates, tightening credit spreads, and an improving credit markets as major catalysts. 

 

Published in Eq: Real Estate
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