March 29, 2024

Fundamentally: When Interest Rates Rise, Stocks Needn’t Fall

Here’s the reality: In May, rates actually rose quite sharply, as 10-year Treasury yields jumped to 2.16 percent from 1.63 percent. Yet the Dow Jones industrial average still soared more than 400 points, to end the month at 15,115.57.

The stock market’s road did become choppy as rates rose. The Dow lost more than 200 points on Friday, for example, but the overall trend remained upward. It just goes to show that while there is a connection between interest rates and the stock market, it isn’t a simple one. When rates rise, said Jeffrey N. Kleintop, chief market strategist at LPL Financial, “it is not the size of the move itself, but the absolute level of yields reached that matters to the stock market.”

Even with the recent uptick, the 10-year yields are only about half of what they were five years ago, during the global recession. And a climb in rates from such a low level may be a tail wind — not a headwind — for stocks, Mr. Kleintop said.

For starters, he said, “it reflects an improving outlook for economic growth and less risk of deflation.” Both are welcome developments to equity investors. Moreover, “it results in losses for bonds,” he said, which may prompt investors to sell those bonds and move money into stocks.

Indeed, over the past month, the average bond fund that invests in long-term government debt has lost more than 6.5 percent of its value, according to Morningstar, the investment research firm. The typical blue-chip stock fund, meanwhile, has gained about 4 percent.

But this is not to say that rising interest rates wouldn’t hurt the stock market at all.

For instance, if rates were to climb enough to threaten the rebound in housing, stocks might start to sing a different tune, market strategists say. But the average 30-year fixed-rate mortgage is still at a historically low 3.81 percent, even though that rate is up since the end of April.

Similarly, climbing rates would threaten stocks if they signaled rising inflation, so that the Federal Reserve might have to curtail its efforts to stimulate the economy. But the most recent reading of the Consumer Price Index showed that prices were up only around 1.1 percent over the past 12 months. That’s down from the 1.6 percent pace of inflation at the start of the year.

So how much would rates have to climb before investors became seriously worried about stocks?

If history is any guide, the threshold is around 6 percent.

Doug Ramsey, chief investment officer at the Leuthold Group, has looked at stock valuations and bond yields going back to 1878. He has found that while there is a relationship between the two, big trouble for the stock market appears to kick in only when 10-year Treasuries are yielding 6 percent or higher.

Theories abound as to why 6 percent seems the magic number. James W. Paulsen, chief investment strategist at Wells Capital Management, argues that 6 percent is important because it reflects the overall economy’s nominal long-term growth rate. “I can see why you’d get a negative reaction if the cost of capital for the market was above the inherent, sustainable growth rate of the economy,” he said.

Mr. Ramsey offers a slightly different explanation. He said that for rising bond yields to hurt the stock market, they would have to be viewed by investors as real competition to stocks. Perhaps at 6 percent, he said, bond yields are high enough that “they are truly thought of as potential replacements or substitutes for long-term stock returns.”

TO be sure, some market watchers say what really matters isn’t the current move in long-term market rates, but what happens with the short-term rate that the Fed controls.

Recently, Ben S. Bernanke, the Fed chairman, hinted that the central bank might soon begin to taper its purchases of Treasury bonds as part of its efforts to stimulate the economy. He did not offer any clues, however, as to when the federal funds rate, now 0.25 percent, might be lifted.

John Stoltzfus, chief market strategist at Oppenheimer Company, noted that whenever the Fed does raise short-term rates, “it could create a jostle in the stock market.” But Mr. Stoltzfus warned investors not to assume that Fed increases would immediately pull the plug on the bull market.

He notes that the last time the Fed started raising rates was in June 2004, when the funds rate was at 1 percent. The central bank proceeded to lift rates 17 times through the end of June 2006. During that stretch, the Standard Poor’s 500-stock index rose 11.3 percent, while the Russell 2000 index of small-company stocks gained 22.5 percent. In the 12 months that followed — while the Fed held rates steady — stocks continued to post double-digit gains.

“What really counts here for investors is, are rising rates crimping the affordability of credit?” Mr. Stoltzfus said. With two-year Treasury notes yielding just 0.29 percent, he said, “I’d argue that we’re far from that point.”

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

Article source: http://www.nytimes.com/2013/06/02/your-money/when-interest-rates-rise-stocks-neednt-fall.html?partner=rss&emc=rss

Bucks Blog: LearnVest Dips Its Toes Into Investment Advice

3:12 p.m. Updated / To add details about LearnVest

LearnVest.com, which started out in 2009 as a budgeting and money management site aimed at young women, is dipping its toes into the world of investment advice and has spiffed up its online tools to appeal to a broader audience.

LearnVest announced Tuesday that it had become a registered investment adviser, or R.I.A., which means that its certified financial planners — who give advice to the site’s users over the phone and by e-mail — can go beyond telling you to save more and pay off your credit card debt and suggest what sort of investments you should use for your retirement money.

However, while LearnVest aims to offer unbiased financial advice at a reasonable price to people who aren’t millionaires, its offering for now stops short of what many investors may truly want and need. Unlike other sites aimed at smaller investors, such as Betterment, LearnVest doesn’t offer advice about specific investments or fund families, and doesn’t actually execute trades or move money.

Rather, the site’s investment advice focuses on educating clients about asset class and allocation in general, not recommendations for specific investments, said Alexa von Tobel, the site’s founder and chief executive. For instance, planners will focus on what proportion of your portfolio should be in large company stocks, foreign stocks, bonds, real estate, cash, etc.  Ms. von Tobel said LearnVest wanted its clients to “feel empowered to select their own investments,” preferably low-cost exchange-traded funds and mutual funds, which she noted were available from a number of providers.

Although the advice may get more specific in the future as client demands evolve, she said, “For now, we’re not going to say, ‘go with this stock versus this stock.’”

In a follow-up e-mail, she said the site was “not offering implementation at this time because we’re focused on helping our clients get a solid footing in the investing space by understanding risk, portfolio allocation and how to minimize fees,” so they can successfully choose investments on their own.

Clients also are on their own in terms of re-balancing investments in retirement accounts and purchasing actual investments. A sample “Portfolio Builder” plan provided by LearnVest, which includes the investment advice component, simply contrasts a fictional client’s existing asset allocation with a recommended distribution. It also advises clients on how to vet a brokerage firm, before suggesting that they “take a look at Betterment, Vanguard, Scottrade, Charles Schwab, Fidelity and E*Trade.”

LearnVest’s basic tools — its budgeting and money-management features, where you can view all your accounts in one place — are available free. If users want to gain access to a planner, they pay according to the level of service. Previously, the highest level was $349 a year, which included development of a five-year financial plan. Now, the highest level is  the “Portfolio Builder” option at $599 a year, which includes a financial plan as well as “personalized guidance” on your investments from a certified financial planner over the phone and by e-mail. The plan includes not only an analysis of your investments, but also a review of financial aspects like estate planning and insurance analysis.

The annual fee includes an introductory diagnostic call and three subsequent calls with your adviser, along with unlimited e-mail access. You don’t get to pick your adviser, but you’ll speak with the same one each time. That flat fee is all you pay; LearnVest doesn’t charge an additional fee based on the total amount of assets under management.

A question now for LearnVest is whether the site’s financial planners can provide quality service to the volume of clients interested in their services. Ms. von Tobel says LearnVest will have 50 certified financial planners on staff by the end of the year, although she’s unsure how many of them will be full time.

A traditional financial planner might handle between 250 and 350 clients on average, she said, although that number varies greatly depending on the clients’ wealth and the complexity of their financial situations. Since she says LearnVest’s planners operate more efficiently, she expects they will be able to handle “a good amount” over that range, although she can’t yet say just how many that might be.

LearnVest has at least 300,000 users, according to numbers the company released six months ago.

As an R.I.A., LearnVest’s planners will have a fiduciary responsibility to act in the best interests of their clients, Ms. von Tobel said. The full-time planners will be salaried and will get bonuses based on customer satisfaction, she said; neither they nor LearnVest as a company receive commissions for selling investments to clients. LearnVest said in its announcement that its planners would “remain completely unbiased, with no product recommendations throughout the client’s experience.” (Part-time planners must work at least 12 hours a week and will be paid a per-client rate, and also will be evaluated based on customer satisfaction).

Certified financial planners must undergo specific training, pass an exam and have at least three years of experience before earning the designation. In addition, Ms. von Tobel described a detailed hiring process that includes having candidates create a video explaining a financial issue and developing a complex financial plan before they are interviewed. The planners will work from locations around the country, she said.

Along with the addition of the R.I.A. designation, LearnVest has added more features to its Web site, such as the ability for a client’s financial planner to log onto a Web page while they are talking to view the client’s finances at the same time that the client is seeing it. Ms. von Tobel said clients had suggested the idea, which helps streamline interactions between the adviser and the customer. (Planners don’t have access to the information unless they are online with the client, she said.)

What do you think of LearnVest’s approach? Would you pay $599 for its level of investment advice?

Article source: http://bucks.blogs.nytimes.com/2012/09/11/learnvest-dips-its-toes-into-investment-advice/?partner=rss&emc=rss