By Rick Schwerd | March 21, 2025
Our investment team remains committed to sharing updates and market insights to keep you informed. Please look for our next update on April 4.
Fed Keeps Rates Steady, Lowers Outlook
Following their meeting this week, the Fed held rates steady at approximately 4.3 percent as expected. They lowered their 2025 GDP estimate from 2.1 percent to 1.7 percent, increased their year-end unemployment rate estimate by one-tenth-of-a-percent to 4.4 percent and increased their estimated inflation rate from 2.5 percent to 2.8 percent. The estimate changes were due to the Trump tariffs and other potential shocks.
The Fed did keep their estimate of two quarter-point rate cuts by year-end and Chairman Jerome Powell’s post-meeting press conference was on the doveish side. There was a divergence in opinion by committee members with 11 members seeing two cuts, but the other eight seeing one or no cuts during the course of the year. It appears the committee was taking a cautious view of the economy, given all the uncertainty, but was ready to ease policy if the unemployment rate began to move significantly higher.
Market Bottoming?
Last week marked the fourth straight down week for equities, with the S&P 500 now down 4 percent and the NASDAQ down 8 percent for the year. However, we did see a strong bounce on Friday that continued this past Monday. There has been more volatility the rest of this week, which is typical of a bottoming process, but it looks like we will break our weekly losing streak.
The S&P 500 hit correction territory, down more than 10 percent from recent highs last week. It should be noted that this marked the fourth pullback of 9.2 percent or more during the current bull market that began in October 2022. These pullbacks are never fun but do periodically happen.
The Case for a Diversified Portfolio
We generally use Investment Update to discuss current events affecting financial markets. Occasionally, we like to discuss other investment-related topics. With the attractive interest rates that have been available over the last few years, we have had many clients ask whether to put their funds in a money market or U.S. Treasuries earning 4 percent, or a diversified portfolio with an allocation in equities. Why take on additional volatility when 4 percent seems like a pretty good return for a “sure thing?”
We thought it would be helpful to show the returns over a 10-year period for a portfolio averaging a 4 percent return versus a diversified portfolio averaging 7 percent, and then add inflation into the calculations.
A $500,000 investment that earns 4 percent per year will be worth approximately $740,000 or 48 percent more after 10 years, which doesn’t sound too bad. However, the same $500,000 earning 7 percent will be worth approximately $980,000, roughly a 96-percent return or double the return of the first scenario.
Now, let’s assume we average 2.5 percent inflation over the same time frame. After 10 years, with a nominal return of 4 percent and inflation averaging 2.5 perfect, your $500,000 would grow to approximately $578,000 in today’s dollars (real purchasing power). This drops your actual return over 10 years to approximately only 15.6 percent in today's dollars.
With a 7 percent nominal return and 2.5 percent inflation, after 10 years your $500,000 would be worth approximately $767,700 in today’s dollars. This results in a return over 10 years of approximately 54 percent in today's dollars. Using our scenario, receiving a 7-percent return over 10 years versus 4-percent results in approximately 3.4 times greater return.
Though there are numerous factors that could affect the actual outcomes of these two scenarios, this may be a useful exercise when considering your options. This is not only to demonstrate that the appearance of a small difference in returns can add up significantly when compounded over a period of time, but also demonstrates that inflation on portfolio returns can have a variety of negative effects.
As always, if you have any questions or concerns regarding markets or your financial planning needs, please reach out to us at (518) 415-4401.
About the Author: With almost three decades of financial industry experience, Rick serves as a Senior Investment Officer at Arrow Bank, formerly named Saratoga National Bank. He oversees individual and corporate retirement plans, personal trusts, investment management accounts, foundations and not-for-profit relationships.