The term “Cake Eater,” which is a saying a person is so rich they can have their cake and eat it too, has long been known throughout Minnesota but it gained broader notoriety from the movie the Mighty Ducks, a story about a rag-tag youth hockey team. Since we are currently in the midst of the state high school hockey tournaments, this term happened to come to mind but it can also apply to retirement. Everyone should aspire to be a Cake Eater, having saved enough so they can fully enjoy their golden years.
Last week was rather uneventful for the markets with no major economic releases or catalysts. The major stock indices did manage to post gains with the S&P 500 finally rising after three weeks of declines. The market also continued to work through the tail-end of Q4 earnings season that seems to have cleared a lowered bar. Retail was in focus with reports from many major retailers, including Costco, Lowe’s and Target. Well-worn themes tended to be solidified, including resilient consumer spending with some concerns about softening demand in the face of inflationary pressures. In the end, the market narrative remained little change over the course of the week.
Interest rates were marginally higher, likely in response to the rising expectations of peak rates. Ongoing positive surprise momentum in economic data, including hints of continued inflationary pressures, have pushed market expectations for the Fed Funds terminal rate above 5.5%. Shorter-term rates continue to rise and longer-term rates, while at their highest levels of the year, are slightly below the peaks seen in October. Rates on one-year and two-year Treasuries are at their highest levels since 2007; much more movement higher and they will be at the highest levels since 2000. For the first time in decades, investments in fixed income instruments appear to be attractive. This is especially the case for “idle” money not earning much interest.
Baking a Cake
You are probably not likely to want to eat eggs, flour, sugar and butter individually until they are mixed together and baked to yield a cake. The right amount of each ingredient is required or the cake may not turn out. Building an investment portfolio is very similar – your overall portfolio should consist of diversified strategies (ingredients). A substantial allocation to a losing strategy can cause pain, just as a rotten egg can spoil a cake, which is why it is important to remain diversified and not be overly aggressive with holdings that can ruin your portfolio.
When you eat cake you notice the flavor of the finished product, the entire cake, not the individual ingredients. Reviewing your investments should be done in much the same way; consider the entire portfolio and do not focus too much time on the individual parts. If your portfolio is built thoughtfully and strategically, the different strategies should work in conjunction with each other to deliver optimal outcomes. There may be times where one of the parts is not performing as well as might be hoped or expected, but the important thing is to consider the results of the overall portfolio, if it aligns with your risk objectives and if it is helping you achieve your goals.
Just like how you might like one flavor of cake, for example chocolate, while other people prefer vanilla or strawberry, investment strategies that work well for other people may not be best suited for you since individual situations are different and everyone has their own unique needs. There is nothing wrong with it being different; do what works best for you but be sure you have an overarching strategy that fits your unique situation. Your portfolio should appropriately match your risk tolerance, risk capacity, and the amount of risk you need to take to achieve your goals.
This week investors will be paying close attention to Fed ChairPowell’s congressional testimony before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday but the key highlight will be labor-market data on Friday. The Q4 earnings season is nearly complete, with only four S&P 500 constituents reporting this week. Next week will bring keep inflation reports, including the Consumer Price Index (CPI) and Producer Price Index (PPI). These are expected to help inform both the Fed’s rate trajectory, with the next meeting being held on March 21-22, and the prospects for soft-landing/no-landing scenarios. The consensus is for a quarter-point rate hike at that Fed meeting, with the possibility of a half-point hike gaining some momentum. Current market pricing now does not expect a pivot lower until March 2024. This expectation continues to be pushed out further and further, so it may be foolhardy to attempt any predictions with much confidence at this time.
If you want to have your cake and be able to eat it during retirement, it is vital to have the proper level of planning so you can live comfortably, spend confidently, and pay taxes consciously. Contact us if you would like to review your individual situation to ensure you have all the right ingredients to make this happen.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # 952-460-3260