Ask an advisor: How to advise clients through a soft landing

Ask an advisor: Are we in for a soft landing?

December 14, 2023 6:08 PM

Jerome Powell, chairman of the Federal Reserve, holds a press conference on Dec. 13, 2023.

Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

Today's question belongs to that last category. In this column, we've written many times about how to guide clients through bad economic news. But how do you advise them when the news is very good?

For almost two years, the bad news for investors has been the relentless rise in interest rates. Since March 2022, the Federal Reserve has raised rates 11 times to wrestle inflation down to a manageable level. The policy has largely worked — inflation is now down to about 3% — but it's also increased borrowing costs for businesses and triggered repeated dives in the stock market.

Then, this week, a glimmer of light emerged at the end of the monetary tunnel: On Wednesday, the Fed announced not only that it was holding rates steady for now, but that it would probably cut them three times in 2024.

"It could just be … that the economy is normalizing and doesn't need the tight policy," Fed chairman Jerome Powell said.

The stock market's response was sensational. On Wednesday, the Dow Jones, S&P 500 and Nasdaq all jumped by about 1.4%, with the Dow reaching a record high.

Clearly, to many investors, the announcement was extremely good news. It not only raised hopes for stocks and profits in 2024, but signaled that the Fed thinks inflation is now largely under control — and we got here without tipping into a recession.

What does this mean for financial advisors? Many clients will likely be overjoyed by these developments. Could their excitement cause bad decisions? What challenges do hopes of a soft landing pose for wealth managers?

To find the answers, I took a turn asking my own "Ask an Advisor" question. Here's what I wrote:

Dear advisors,

Yesterday the Fed gave investors an early Christmas present: It announced that it's likely done raising interest rates — and may lower them three times next year.

Suddenly, 2024 looks a whole lot brighter. No one — not even Jerome Powell — can predict the future, and the economy can still change in unexpected ways. But fundamentally the Fed's announcement seems to bring something that had long been a distant hope a lot closer to reality: a soft landing.

My question for you is twofold: First, what do you think this news means for the economy in 2024? And second, what does it mean for your practice? How do you expect clients to react — or how have they reacted already? How do you plan to advise them?

Sincerely,

Hopeful by the Hudson

And here's what financial advisors wrote back:

Prosperity, with perils

Robin Hovis, financial advisor at

LPL Financial

in Millersburg, Ohio

I was surprised and delighted by the Fed's announcement! Chairman Powell's previous statements gave me the impression that another rate increase was possible, and that rate cuts were two or three years away. This encouraging stance by the Fed will stimulate small and large businesses to start planning for expansion, which leads to more jobs and more prosperity. The tricky part will be managing the increases in jobs so that it does not spark runaway competition for workers, which in turn leads to increased wages and thus inflation.

I foresee more small businesses establishing SIMPLE IRA and 401(k) plans, and likely an increase in rollover business as increased prosperity and stock market gains will enable more older workers to retire. Again, this will create a challenge for economic policymakers because it will threaten further labor shortages. The challenge for economic policymakers in 2024 will be to help businesses deal with the labor shortage.

Don't get carried away

Ryan Salah, certified financial planner and partner at

Capital Financial Partners

in Towson, Maryland

No one knows for sure, but it's apparent that everyone is predicting lower rates by the middle or end of 2024. Powell was quoted saying even though inflation isn't at their 2% target, they'd want to consider cutting before inflation gets to 2%, due to lags in economic data. A contrarian view would be to consider that if inflation stays elevated (specifically in labor/services), there could be no cuts at all.

We always aim to manage behaviors and expectations as we adjust portfolios. The only challenge in investor conversations with the recent market developments is to not let clients get carried away with recent growth, which could lead them to believe there aren't risks in the market. There is always risk!

Check your greed

Noah Damsky, chartered financial analyst and principal at

Marina Wealth Advisors

in Los Angeles

Lower rates will be supportive of the economy, which means the risk of a hard landing has declined. This also increases the risk that inflation picks back up — something we have to keep an eye on, since higher rates were successful at stemming inflation.

My clients are relieved that higher interest rates may be a thing of the past. We remind them that while this is likely positive for equity markets, it's negative for bond markets and savers, and could spur higher inflation. There are always trade-offs!

The name of the game is keeping clients on track and preventing them from making emotional changes based on the headlines. When they expect times to be good, staying invested isn't as challenging. What is challenging is maintaining reasonable expectations and not letting greed take over. This means retaining an allocation to bonds and staying away from speculative fads.

A recession deferred

Jeremy Bohne, founder of

Paceline Wealth Management

in Boston

The U.S. economy continues to make progress in the fight against inflation, but we haven't fully extinguished the problem just yet.

The big issue here is that policy decisions, including interest rate changes, can take a long time to play out in the real economy, so we're flying somewhat blind until we reach our destination, whatever that might be.

The Fed meeting means that avoiding recession is a higher priority than finishing the fight against inflation, so if we were headed for a rough patch, that's been somewhat deferred.

It does, however, mean there's a possibility that problem inflation might eventually rear its head again.

This is supportive of economic growth in 2024 overall, but struggling industries which require access to funding will still face many of the same challenges as they did this year.

Stay the course

Jay Zigmont, CFP and founder of

Childfree Wealth

in Water Valley, Mississippi

The fact that rates may go down is good. I won't trust that it's going to happen until the first rate reduction. One of the big discussions this year with clients will be to start the process to move them from cash to the market. Many clients have taken advantage of the high interest rates and have cash in high-yield savings accounts. As interest rates go down it will be less attractive to keep money there, so it is time to start the discussion.

Overall, good or bad news does not change my investment advice, because we follow a long-term, passive investing strategy. We don't try to time the market. The bounces of markets and rates are fun for TV pundits to talk about, but when you are investing for decades it really doesn't matter much.