8 min read

The Lowdown On High Rates

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Hi there,

Congrats, you (almost) made it through March! Hopefully, we’ll leave bank failures and freezing temps behind when the month closes tomorrow. 🤞 As we enter the second quarter, new reports point to the impact of climate change on both allergy season and proxy season (two phrases we never thought we would say in the same sentence).

What’s proxy season, and what does it have to do with climate change? We’re so glad you asked…

The basics: Most public companies hold their annual general meetings in the spring, where shareholders have the chance to vote on issues like board members, executive compensation, and various proposals put forth by other shareholders. Anyone who can’t be there in person can vote through a proxy ballot (and that includes you if you own stock in a public company).
How to vote: If you own stocks, be sure to check that stack of mail sitting on your kitchen counter for your proxy ballots, as well as your inbox, as many notices also come via email. Then check out the FWIW primer explaining how you can exercise this investor superpower.
The issues dominating the agenda this year: Shareholders have filed 542 resolutions on a wide range of issues, according to a new report. Nearly 25% of this year’s shareholder proposals are related to climate change. Shareholders also put forth many proposals related to other environmental issues, political influence, and human rights concerns. If you don’t have time to read the full report, S&P has a quick snapshot of the findings.

Meanwhile, the high-interest rate economy and banking crisis are prompting investors to think carefully about where to put their money. We’ve compiled 5 recommendations from experts to help you and your friends manage your savings and investing in the current environment below.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

News you can use

Graphic of news publication with headline of "News"

The European Union just passed new rules to eliminate carbon dioxide emissions from new cars and vans by 2035. Regulators were poised to completely ban the sale of internal combustion engines (ICEs), but at the last minute, they made an exception for cars that use e-fuels, a synthetic alternative to gasoline. The exception is a win for luxury car makers like Porsche and Ferrari, which have not been keen to phase out ICEs.
With Q1 wrapping up, it’s time to take stock of stock performance. This handy chart makes it easy to see the biggest swings in the S&P 500. Overall, the index is up around 4% for the year, with tech stocks ⬆️ and bank and pharma stocks ⬇️.
Do you want to consider investing in green buildings? Barron’s has identified the 10 most sustainable US REITs for those expecting the real estate sector to rebound. The top five are AvalonBay Communities, Kilroy Realty, Boston Properties, Host Hotels & Resorts, and Ventas. Avalon’s lead was attributed to its “terrific” environmental efforts, like increasing use of solar energy and improving water efficiency and waste management, as well as its “robust” cybersecurity program.

Figure in focus: 300 Million

300 million full-time jobs could be replaced with generative artificial intelligence (AI) in the future, according to a new report from Goldman Sachs. This is the technology that powers chatbots like ChatGPT and those trippy image creators like DALL-E 2. The good news, according to the authors, is that automation has historically led to the creation of new jobs and occupations. They also predict AI will lead to a productivity boom that increases annual global GDP by 7%.

There are plenty of exciting ways for AI to help us, including with the climate effort, but not everyone is feeling unequivocally cheery about recent developments. Over 1,000 notable tech experts, including Tesla CEO Elon Musk, Canadian scientist Yoshua Bengio, and Apple co-founder Steve Wozniak, have signed an open letter asking all AI labs to immediately pause, for at least six months, the training of AI systems more powerful than ChatGPT-4 because of the “profound risks to society and humanity.”

There have also been growing concerns about app ethics, especially after Microsoft laid off its entire AI ethics and society team. A bright spot is Adobe’s new AI image generator, Firefly, that’s trained to protect original artists.

These are all issues sustainable and values-aligned investors will have to think about, and we’ll be watching as more companies enter the field.

Prepping for a high-interest-rate world

When Madonna recorded “Material Girl” in the mid-80s, it was a heady time of rapid economic growth, wealth accumulation, and shoulder pads. Interest rates were on their way down, and the mood was optimistic. Today, she might sing it much more somberly: “🎶We are living in a high-interest-rate world, and I am a high-yield savings girl 🎶.” Many market commentators are saying the free, cheap, or easy money era has come to a screeching halt, and we’re now at the start of a more frugal high-interest-rate era.

So what are these rising interest rates everyone’s talking about, and what do they mean for you and your money? We break down some key tips experts are recommending we all take below.

What do we mean by interest rates?

The Federal Reserve manages economic inflation by setting the federal funds rate. This is the interest rate at which banks can borrow money from each other. It also influences how much interest they charge customers on loans or pay on deposits. Put simply, rising interest rates make borrowing more expensive and your savings more profitable.

What’s going on?

Interest rates were at record lows for a long time and widely expected to stay there. But there’s been a major shift lately.

When the COVID-19 reopening and supply chain snarls caused record inflation, the US Federal Reserve had to step in to stabilize prices. It reduced the flow of money into the economy by quickly raising the cost of borrowing. Rates have gone up rapidly from near zero to 4.83% in just a year. It’s the equivalent of turning down the water spigot from full gush really quickly.

Since inflation has proven more stubborn than a red wine stain, many analysts say that more hikes are very likely. Wall Street traders expect rate cuts to begin later this year, but strategists at BlackRock warn this is too optimistic. Steven Shields, an economist at Moody’s Analytics, also believes the Fed will keep rates at a peak of 5% to 5.25% until the first meeting in 2024. “Monetary policy will remain restrictive through the end of 2025. The fed funds rate will return to its neutral rate in early 2026,” he wrote on March 23.

How to prepare for prolonged high interest rates

There’s a possibility rates will stay elevated, and we’re already seeing them have a very real impact on the economy, like mass tech layoffs and falling housing prices as mortgage rates soar. The crisis in the banking sector has claimed its first few victims, and other lenders are also reluctant to give out loans as deposits dry up.

As we are seeing signs that this may be the “new normal,” we want you to be prepared. Here are five keys experts are recommending as you prepare for this extended phase of higher interest rates:

Maintain emergency savings in high-interest accounts: Economic growth slows during rate hike cycles, which usually leads to financial hardships for many. What you can do to make sure you’re not badly affected and in a position to help others is build an emergency fund of three to six months’ worth of expenses. Put this cash in a high-yield savings account so that you have easy access to it and can take advantage of the high interest banks are offering on deposits.

Reduce your expensive debt: When the Fed raises interest rates, paying back loans without a fixed interest rate gets increasingly expensive. Credit cards are a classic example of expensive debt – the average interest rate is now a whopping 24.15%, according to Forbes Advisor's weekly credit card rates report. Budget and save up to pay down this kind of debt as soon as possible.

Stay invested: If you’re investing for the long term (AKA the mantra of many FWIW readers), it’s important to keep your emotions in check and avoid panic-selling when the market swings in different directions. Trying to time the market by exiting and reentering at the right time is extremely difficult, even for the pros, and missing out on a few of its best days could cost you, as this chart from Fidelity shows. Instead, experts recommend staying invested, continuing to add to your diversified and balanced portfolio, and remaining confident in the knowledge that the market will eventually recover.

Add quality stocks: Now’s not the best time for big risks like meme stocks or unproven tech players. “…you want to look for companies, not just within the financial sector, but everywhere, that have strong balance sheets, that have high cash, low debt, that are what can be thought of as self-funding companies. They can fund their operations based on their cash flow,” said Liz Ann Sonders, Schwab's chief investment strategist. Some other factors she advises looking for are increasing dividends, positive earnings revisions, and positive earnings surprises.

Investors can also consider recession-resistant shares. These are companies that tend to do well even during periods of economic turmoil, like discount retailers and packaged food manufacturers.

Seek income and hold onto your bonds: As the economy slows, it’s helpful and reassuring to buy so-called safe investments that provide an income, like bonds, bond ETFs, and dividend-paying stocks.

Dividend stocks, on average, outperformed the market by 4.5% during the 2001, 2008, and 2020 recessions, according to UBS data reported by CNBC. The bank picked a few companies with higher-than-average yields and potential to keep rising in price, including clean-tech investor Hannon Armstrong Sustainable Infrastructure Capital, fertilizer maker Nutrien, CVS Health, and financial firms AIG, Huntington Bancshares, BNYMellon, and Fifth Third Bancorp.

BlackRock strategists have advised clients to “focus on investments like fixed income that is indexed to inflation, as well as very short-duration government bonds.” Since bond prices drop when interest rates rise, you should hold them until maturity to avoid selling them at a discount.