Useful Advice as Rates Rise and Markets Move

The beginning of 2022 has been characterized by a clear and dramatic increase in market volatility, coupled with continuing signs of a fast-paced economic recovery.

Analyses show that the economy is expanding quickly, and the U.S. Federal Reserve is growing more worried about inflation than employment. So much is clear in early 2022, but what comes next for the markets and the economy is not, and so financial advisers are being called upon to help their clients make sense of a very murky and, at times, contradictory outlook.

These themes are explored in new survey data published by the wealth management firm D.A. Davidson. The survey results show a clear need for advisers to better educate their clients about the implications of inflation and rising interest rates—including both the opportunities and challenges that the emerging market environment may bring.

A Timely Moment to Refinance

According to the survey, two-thirds of individuals with debt are not planning to refinance or consolidate their debt in the next year. This means they are possibly missing an important financial savings opportunity amid the current economic and interest rate environment. Naturally, as rates rise, the opportunity to refinance debt will become less attractive, meaning time is increasingly of the essence.

The survey results show 50% of those with debt who work with a financial adviser are actively making this consideration. Additionally, individuals who work with a financial adviser are more likely than those who don’t to say they fully understand the impact of rising rates and inflation on their personal finances.

“With markets off to a choppy start in 2022 and rate hikes on the horizon, inflation is top of mind for many investors,” says Andrew Crowell, vice chairman of wealth management at D.A. Davidson. “Especially in this inflationary environment, working with a financial adviser and making financial resolutions at the beginning of the year, or really at any new chapter, can be critical to achieving financial goals.”

According to the survey, the percentage of individuals who feel they fully understand the impact of rising rates and inflation on personal finances increases with age, with 79% of Baby Boomers feeling this way compared with 70% of Generation Xers, 69% of Millennials and 62% of Gen Zers. The analysis suggests that this is likely the reason why Baby Boomers are most concerned with paying off debt in 2022, while younger generations’ biggest priority is saving for the future.

Budgets and Inflation

In a similar vein, the survey shows, older generations are more concerned with budgeting amid rising inflation in 2022 compared with their younger counterparts.

Underscoring their need for professional support, more than half (51%) of respondents did not have or create a written financial plan as of the end of 2021. Of those who did, however, younger generations were more likely to have a written financial plan than older generations.

While three-quarters of respondents do not currently work with a financial adviser, one-third are considering starting to work with one in 2022. Currently, Baby Boomers are most likely to be working with financial advisers (31%), followed by Gen Zers (24%), Millennials (22%) and Gen Xers (22%).

Nearly half (49%) of Millennials who do not currently work with a financial adviser are planning or considering starting to work with one this year. This is the highest percentage across generations.

Too Much Risk?

Natixis Investment Managers also released new survey data this week, publishing the results in a report that considers many of the same themes as the D.A. Davidson research.

According to Natixis, 80% of the investment professionals responsible for fund selection and portfolio construction at leading wealth management firms, private banks and wirehouses across North America agree that investors have taken on too much portfolio risk in a rate environment that has “distorted stock values and decimated bond yields.”

The survey data shows market sentiments voiced by fund selectors reflect a shift in the market forces that drove stocks to record highs last year and now call for portfolio repositioning as central banks contemplate raising rates, markets begin to normalize and the world learns to live with COVID-19.

“Wealth managers’ goal is to construct portfolios with the right balance of risk and return for each investor that helps them avoid emotionally charged buying or selling and positions them for success,” says Matthew Coldren, executive vice president and head of the U.S. financial institutions group at Natixis Investment Managers. “To address their clients’ increasingly complex needs, financial advisers today are using sophisticated strategies and tools that were once available to only the largest institutional investors, which can help give their clients a leg up on achieving their financial goals.”

The vast majority of financial professionals polled by Natixis anticipate multiple interest rate hikes this year, which would have implications for stocks and bonds. The survey shows that these fund selectors are working hard to manage both investments and investor emotions during the volatile transition to a higher rate, high-inflation environment. About two-thirds say more frequent rebalancing will be important as markets churn.

Mixed Economic Sentiment

Notably, the Natixis survey shows that fund selectors are mostly confident in the resilience of the economy and the ongoing rebound from the lows of early 2020. However, they see supply chain disruptions, which 62% expect will continue until 2023, as the biggest potential threat the economy, followed by relations between the United States and China (43%).

On a macro level, fund selectors are less concerned about the economy’s ability to weather tightening monetary policy (35%), government spending (34%) and COVID-19 variants (31%). Despite the ongoing surge of cases of the Omicron variant, a solid majority of 61% don’t expect new variants to slow economic growth this year.

On the other hand, a troublingly high 85% of fund selectors surveyed believe high valuations are distorted by super-low rates and don’t reflect company fundamentals (66%), while 72% think the stock market has grown at a rate that isn’t sustainable. Their top portfolio risk concerns are now inflation, interest rates, volatility and valuations.

Positioning Portfolios

In the Natixis survey, fund selectors cite opportunities for growth in a market environment that 75% think will favor more active management. The following are some of their most common suggestions and sentiments:

• Investors can expect better returns on the reopening trade than the stay-at-home trade;
• Investors can expect better returns in value over growth stocks and in small-cap over large-cap companies;
• Tactical rotations to more economically sensitive and value-oriented sectors may pay off, including to financials, energy, health care, consumer discretionary and information technology stocks; and
• It is important for investors to remain committed to the critical role fixed-income plays in portfolios, though it will be highly important to counter duration risk as rates begin to normalize.