As we’re quickly approaching year end it’s a good time to reflect on how recent developments may impact nonprofit portfolios. Earlier this quarter the Federal Reserve (Fed) announced it would push its target date for a federal funds rate increase until 2023. This certainly reflects the Fed's attentiveness. It's good news for long-term institutional investors like nonprofit organizations whose assets are typically meant to last in perpetuity and for whom inflation is a big long-term liability. Most investment policies require maintaining the purchasing power of these assets over time. For example, over a ten-year period, an annual inflation rate of just 2% will erode about 15-18% of the value of these important assets. So when we build investment portfolios, we account for that in the asset allocation work that we do.
Meanwhile, there has been a lot of press on inflation and the economic outlook. The Fed is calling inflation “transitory,” or temporary, as pent-up demand from the pandemic starts to get released. But will that trend continue? Recently there have been reasons to take pause as COVID-19 cases are on the rise in much of the nation and schools head back into session. We have yet to see how this will impact inflation.
Let’s assume for a moment that we get past this recent rise, economies around the world continue to open up and we see cyclical growth increase. What does that mean for interest rates, inflation and asset values over the next few years?
Jim Solloway, SEI's Chief Market Strategist, reminds us that historically, even after the federal funds rate starts to increase, the market continues to do well as this means we are seeing positive signs of economic growth. Since 1928, there have been 20 interest rate increases. In two-thirds of those cases, the stock market was higher six to 12 months afterward, and the average gains were stronger than they were over the entire period. Two to three years after a rate hike, inflation can have a bigger impact, especially if it is embedded in wages. The Fed believes that the tightness we are seeing now in the labor market and supply chains will work itself out post-pandemic. While we do not have a crystal ball, this gives us some insights to help us with asset allocation decisions and allow our expert managers to position portfolios for these potential outcomes.
Please enjoy Jim’s webcast, which details our expectations in an easy to understand presentation. We hope that this brings clarity to the economic landscape as you make decisions now to position your portfolios for long-term success.Watch: Economic Outlook Presentation
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