Interest rates stand at a two-decade high and are likely to stay higher for longer than many advisors and investors seem to expect. The result is that monetary policymakers' effort to suppress inflation could lead to unwary clients getting burned.
This was one of the viewpoints offered up by Skip Schweiss in an interview with ThinkAdvisor, given a few months ahead of his third anniversary as CEO of Sierra Investment Management.
Federal Reserve officials now expect to make only one interest-rate cut this year, Schweiss noted, having previously predicted as many as three in March. Jerome Powell, the Fed chair, once again emphasized that the actual decision about cutting rates will hinge on cooling inflation data — not on the markets' wishes or expectations.
And so, investors should be prepared to "listen to the Fed" and stop some of the wishful thinking about rates returning to rock-bottom levels, Schweiss said. They should also think more clearly about just how much economic pain would be needed for rates to fall back down to their pre-pandemic, near-zero levels in anything like a rapid fashion.
It's a classic case of "be careful what you wish for," Schweiss said.
Schweiss is the former president of TD Ameritrade Trust Co. and managing director of advisor advocacy for TD Ameritrade Institutional. He was also the 2021 president of the Financial Planning Association, a role he took on after a prior five-year stint as a board member.
These days, the focus is on growing the distribution of Sierra Mutual Funds and supporting the firm's clients as they navigate a fast-evolving market environment. The role of the financial advisor and how to facilitate client access to the equity and bond markets is undergoing major change, Schweiss added, so the work remains highly engaging.
On Rates and Fed Policy
Schweiss characterizes Inflation and interest rates as "the big open question right now,"
"Nobody can predict the future," he said, "but I've been saying consistently for two years straight now that we shouldn't be expecting big rate cuts. I've said that because I am listening to the Fed."
It almost seems like a decontextualized desire for cheaper credit has been baked into the minds of many market participants, Schweiss said, especially those investors who first entered the markets or otherwise saw their portfolios grow during the period after the Great Recession and before the COVID-19 pandemic.
"It's like everybody got hooked on historically low rates for more than a decade," Schweiss said. "But we have to remember, those rates were not 'normal.' Even today, at rates above 5%, if you are looking at long-term historical averages, rates aren't even that high right now. We're about average, and there's no law that says rates have to go down right away."
Another important consideration that may put a damper on big moves from the Fed is the upcoming U.S. elections, Schweiss said.
