Investment News: February 2023

As we navigate the constantly evolving economic landscape, it’s essential to take a closer look at key indicators and trends that affect investment decisions. While inflation has been a hot topic recently, the economy is showing signs of stabilization, and with that, new opportunities are emerging for investors, particularly those looking for safer, more predictable returns. Let’s dive into the latest figures on inflation, interest rates, and investment opportunities to help you make more informed financial decisions.

Inflation: A Mixed Bag of Data

Inflation has been a headline issue for over a year now, but there is good news on the horizon. After peaking in June 2022 at a staggering 9.1%, inflation has been steadily subsiding. The current year-over-year inflation rate is hovering around 6.5%, a marked improvement though still relatively high compared to historical averages. On a more encouraging note, the 6-month annualized Consumer Price Index (CPI) sits at about 1.8%, signaling a gradual decrease in inflationary pressure.

However, it’s important to remember that inflation impacts different sectors in varying ways. For instance, the cost of food and energy continues to rise at a faster pace than other goods and services, with food prices seeing a year-over-year increase of approximately 12%, and energy costs up around 7%. When we exclude food and energy from the calculation, core inflation remains at about 5.7%. This nuanced view of inflation shows that while the overall trend is improving, certain areas remain challenging for consumers.

The Federal Reserve’s aggressive interest rate hikes over the past year seem to be working to curb inflation. While these rate hikes are not without their risks, they have also created some unexpected opportunities for conservative investors.

Higher Interest Rates: A Silver Lining for Safe Money Accounts

One of the benefits of the Federal Reserve’s interest rate increases is that they have made safe money investments—such as Money Market accounts, Certificates of Deposit (CDs), and Fixed Indexed Annuities—more attractive. For the first time in over 20 years, we are seeing competitive rates on these traditionally low-yield investments.

This can be particularly advantageous for retirees or anyone looking to preserve their capital while earning a reasonable return. With inflation gradually pulling back and interest rates remaining elevated for the time being, now might be a good time to lock in these higher rates.

For instance, many financial institutions and insurance companies are currently offering CDs and fixed annuities with attractive rates. However, it’s important to be strategic about the term length of these investments. Given that the Federal Reserve has signaled it will likely halt rate increases once inflation stabilizes, locking into a longer-term investment now could allow you to secure these higher rates for several years, even as rates may begin to decline in the near future.

Are We in a Recession?

A common question many investors are asking is whether we’re currently in a recession. The answer isn’t entirely clear-cut. Technically, we might be in what some economists are calling a “mild recession,” but the real-world data doesn’t always support the traditional indicators of economic downturns.

Driving around on a Saturday morning, you may notice packed highways, busy stores, and bustling airports—hardly the scene of a struggling economy. Travel is up, people are shopping, and businesses appear to be operating at full capacity, which is a stark contrast to the near-empty streets we saw during the height of the pandemic in 2020 and 2021.

This activity suggests that while economic growth may have slowed, consumer behavior remains robust. Factories are running, parking lots are full, and people are spending. That said, some numbers indicate that we are in a mild recessionary period, and this could persist throughout 2023. What does this mean for your investments? It’s likely that a more stable, growth-oriented phase will return in the near future, which could impact interest rates and inflation further.

Locking in Today’s Rates: A Smart Strategy for the Future

When considering where to invest in this environment, it’s essential to think about the long-term implications of today’s interest rates. While short-term CDs and fixed annuities may seem attractive, it’s worth considering the potential downside. As inflation continues to cool and the Fed signals an end to rate hikes, the high interest rates we are currently enjoying may not be available in one or two years.

One strategy to mitigate this risk is to lock in today’s rates for a longer period. Options are available for 3, 5, 7, or even 10-year terms, allowing you to secure these favorable rates for the long haul. By choosing a longer-term commitment, you can avoid the scramble to find competitive interest rates once the shorter-term options mature. In an environment where future rates are uncertain, locking in a guaranteed return now can offer peace of mind and financial stability.

The Bottom Line

The economic outlook may be uncertain, but that doesn’t mean you have to be reactive in your investment decisions. By understanding inflation trends, leveraging the current high-interest-rate environment, and planning for the long term, you can make smart, informed decisions that protect your financial future.

Investing in CDs, Money Market accounts, and Fixed Indexed Annuities during this period of elevated interest rates can provide security and growth potential. By carefully considering the term lengths of your investments, you can ensure that you continue to benefit from today’s higher rates well into the future. As the economy continues to evolve, staying informed and proactive will help you navigate whatever comes next.

If you’re uncertain about the best strategies for your specific situation, it’s always a good idea to consult with a Certified Financial Planner who can help guide you through these challenging times.