Written by Dr. Guy Baker, Founder, Wealth Teams Alliance

Fed Chair Jerome Powell has hinted strongly recently about a potential rate cut in September. No surprise there. Conventional wisdom says lower interest rates are good for the economy because they stimulate economic growth, boost consumer spending, encourage investment, and allocate more capital to reducing debt. The stock market tends to respond positively because cheaper money increases the velocity of money, which in turn boosts corporate earnings and stock prices.

The increased velocity of money also raises total tax revenue, giving the government more money to use toward initiatives that legislators favor. Whether you ascribe to Keynesian (supply-side economic theory) or Austrian School (push-pull theory), the first question is, are interest rates too high? And if they are, are they artificially high or do they accurately reflect market reality?

Looking back over the past century, the prime interest rate dropped dramatically following the tech crash of 2000-2003, then rates rose again, leading to the Great Recession of 2008-2009. Following that period, interest rates dropped dramatically to historic lows again. Then they increased gradually until the COVID downturn in 2020. What happened next? You guessed it. Rates dropped again until 2023, when the U.S. economy reacted to the inflation response caused by the pandemic and rose to where they are today.

As an observer of the economy, what do you think the next phase of economic response will be? Remember, money has no bias or favorites. It will always seek the most efficient outcome. Artificial efforts can try to alter the course of money, but like a powerful river, it will eventually go wherever it wants.

Before answering that question, consider three important factors that should influence the future direction of the economy, markets, and your sense of well-being:

1. Economic Weakness

The Fed cuts rates when it thinks the data reflect a weakening economy. A struggling economy means lower demand for goods and services, which can depress corporate earnings and, eventually, stock prices, even if interest rates are lower. When the economic outlook is uncertain, corporate leaders and investors become more cautious about investing in growth.

Here is a breakdown of the GDP components for Q2 2025. Remember, this follows a negative 0.5% GDP in Q1 of this year. There is continued weakness in consumer spending and a reduction in investments. Government spending on non-defense and exports was minimal. Imports were the main contributor to GDP growth. In other words, this growth was likely an artificial reaction to the promised tariff increases that are about to be levied. If you remove imports, then GDP was likely negative for Q2, meaning we are in a recession by the traditional definition of two consecutive quarters of negative GDP.

2. Inflationary Concerns

While lower interest rates boost economic activity, they can also lead to higher inflation, which can undermine the effectiveness of those low rates. Add that to the likely inflationary impact of President Trump’s sweeping tariff policy, and it’s hard to imagine a near-term scenario in which rising prices don’t put inflationary pressure on the economy and on consumers. Personal Consumption Expenditures (PCE), which the Fed watches closely, have remained relatively steady over the last 12 months. However, PCE (minus food and energy) is rising. These figures do not anticipate the impact of the coming tariff changes. It is unlikely the Fed would interpret PCE as an argument for lowering rates.

Of course, the Fed also closely watches unemployment data and will take action if rising unemployment is deemed a threat. Unemployment held steady throughout the spring and summer post-Liberation Day, but as we go to press, the monthly Job Openings and Labor Turnover Summary (JOLTS) showed that unemployment outpaced the number of available job openings for the first time since the pandemic era.

3. Market expectations and timing

Investor expectations heavily influence stock prices. For this reason, the impact of a rate change usually begins well before the Fed acts. When investors expect a rate reduction and the economic outlook is good, stock prices rise. Once the Fed implements a cut, the after-effects can be minimal. The exception is when the rate reduction is more (or less) aggressive than investors anticipated. In that case, the market may shift again as investors adjust to new circumstances.

Fed behind the curve (again)?

As a data-dependent policymaker, the Fed relies heavily on recent data to make its decisions. However, since most of the data is dated (and often adjusted) by the time the Fed sees it, rate cuts tend to be reactive rather than proactive, making investing in markets so powerful. Conventional wisdom says that every Fed rate cut over the past quarter century has preceded a recession, but that is not always the case, as we saw in 1995, 1998, and 2021 when we avoided a recession and enjoyed robust gains in stocks (+34%, +26% and +31%, respectively).

Instead of trying to “front run” the data, be the data.” Markets have already priced in true unemployment, inflation, and GDP data before it hits the news or the Fed sees it. Investors using data-sensitive investment methodologies will always be late to the party.

The weakness in the jobs data over the last few months suggests an economic slowdown is already underway. Even so, most sectors of the economy have yet to feel the full effects of the Trump tariffs or the economic slowdown that is in progress. Yet, the Fed is only now preparing for a reactive interest rate cut. The question is, have the tariffs already hit the market?

I’ve often found the Volatility Index (VIX) to be helpful at times like this. Also known as the “fear gauge” of the stock market, the VIX measures market expectations for volatility over the next 30 days, based on the prices of S&P 500 index options. The VIX is a valuable tool for assessing market sentiment, anticipating market movements, and making the next investment decision.

Some say a low VIX is a sign of complacency, and a market shock could cause the VIX to spike rapidly. While the index implies low broad-market volatility, several underlying factors indicate potential risks. For instance, the VIX measures the expected volatility of the S&P 500 index as a whole — it doesn’t account for significant volatility in individual stocks, particularly in the technology (Mag 7) and AI sectors. Also, a low VIX does not mean that all risks have disappeared. Inflation, interest rates, and trade policies continue to evolve, and any unexpected news could easily trigger a shift in market sentiment.

Investing through the clouds of uncertainty

1. For investors with sufficient assets who are nearing (or in) retirement, divvy up the assets between income-producing assets (fixed income, private capital debt, first trust deeds) and equities. Given that market downturns don’t usually last longer than five years, set aside five years’ worth of income in liquid, low-risk fixed income investments. Focus on low-duration risk — lower yields and higher liquidity if interest rates rise. Then invest the equity for long-term growth to cover inflation and longevity risks.

2. For younger investors, consider your time horizon and your attitude toward the long-term outcome of the market. The historic IRR of the S&P 500 is 10.4%. Is there any reason to think that it will change between now and when you retire? Mountains of research show that markets are very predictable over longer time frames. You need to stay focused on the long-term benefits of investing, rather than on short-term risk management.

The challenge is decoupling our emotions from what the evidence shows. It’s easy to get caught up in the short-term noise and think “this time it’s different.” My basic rule is this: “If you are invested, stay invested.” However, with new money, cash, an inheritance, the sale of a business, or other major assets, it’s important to take a long-term view toward allocation. Again, wise investing is a function of age and risk, and then practicing wisdom and caution when handling large amounts of liquidity.

by Guy Baker
(originally published on wealthmanagement.com on June 17, 2025)

Conventional wisdom says that when stocks fall, bonds (particularly Treasurys) will pick up the slack. During April’s tariff announcements, however, stocks tumbled as expected, but bond yields rose, meaning their prices fell and didn’t come to the rescue. For many investors (and some advisors), 2022 felt like a déjà vu when both stocks and bonds tanked by double digits amid high inflation and a series of Fed interest-rate hikes.

Some clients may be fearful that bonds are no longer a reliable hedge against stock market volatility. I wouldn’t go that far, but now might be a good time to review the myths and misconceptions about bonds in your portfolio.

Seven Common Misperceptions About Bonds

1. Bonds are always safe. While it’s true that bonds are generally less volatile than stocks, they are not risk-free. When an investor purchases a bond, they lock in a coupon rate and a maturity value. But a lot can happen between the purchase date and the sell date. Bonds held to maturity expose investors to the risk of inflation and a loss of purchasing power. But that’s not all. The coupon rate prices in credit risk in case the issuer runs into financial difficulties and defaults. The higher the risk, the higher the coupon rate required to attract money. Investors must be aware of the risks associated with the bond terms and the credit risk.
   
   For instance, a 10-year bond earning 5% with an AA credit rating and a two-year bond earning 5% with an AA credit rating face entirely different risks if interest rates increase. The liquidation value will be impacted significantly more for the 10-year bond than for the 2-year bond. This impact is called duration risk. The longer the duration, the more a bond’s price will fluctuate in response to changes in interest rates. Generally, bonds will state their duration risk. If the duration risk is 4%, it means that for every 1% rise or fall in the interest rates, the bond value will adjust up or down by 4%. So, a bond with a face value of $100,000 would be expected to decline to $96,000 if the interest rate increased by 1%. However, if the investor holds the bond to maturity, they are contractually guaranteed they will receive the full face value (assuming no default).
2. Rising interest rates always hurt bonds. While it’s true that higher rates can negatively affect the price of existing bonds, it also means there are opportunities to invest in higher yields, thus benefiting long-term investors. Additionally, if the general economic climate suggests rates will come down, buying a 30-year bond with a 20% discount off its maturity value represents a substantial appreciation opportunity in the bond value, and the investor still receives the coupon rate annually.
3. Bonds are only for retirees. Bonds can play a crucial role in portfolio diversification for investors of all ages, as fixed income helps balance out risk and provides a steady income. The investor’s risk capacity—the amount of tolerable risk given their time horizon—is often very different from their risk tolerance—their comfort level with short-term volatility, such as what we are seeing today. Even for young investors and others with a high risk tolerance and/or a long time horizon, a modest allocation to bonds can help insulate a portfolio against stock volatility without sacrificing too much upside.
4. Government debt causes bond yields to skyrocket. Everyone is concerned about the federal government’s nearly $2 trillion annual deficit. Sure, large deficits can influence interest rates, but several factors determine bond yields, including investor demand and the Federal Reserve’s interest rate policy. Some investors may fear that the U.S. government will default on its obligations, thus making all outstanding Treasuries worthless. While anything can happen, a government default would have a catastrophic global impact and seems unlikely. Generally, our firm maintains a short-term approach in its bond portfolios to minimize duration risk. But in times when interest rates are likely to drop a full 100 to 200 basis points, investing in 30-year Treasuries can be an exceptionally good option.
5. Corporate bonds are too risky for retirees. Unlike investors in Treasuries, investors in corporate bonds must evaluate both credit risk and duration risk. Highly rated corporate bonds can be a valuable part of a diversified bond portfolio since they typically offer higher yields than U.S. Treasuries. Plus, the income stream is predictable, and the default rate, while higher than Treasuries, is relatively low compared to junk bonds and other lower-rated corporate debt.
6. Individual bonds only make sense for very large investors and institutions.  Conventional wisdom says an investor needs significant capital to achieve diversification with bonds and must constantly monitor which of their bonds are maturing. However, holding individual bonds (as opposed to bond funds) can be advantageous regardless of size. Here are three reasons why:
7. • Predictable returns since the investors receive fixed interest payments and since the principal is paid back in full at maturity, assuming there is no default.
   • Control. You can choose specific bonds that allow customization based on credit, maturity, and industry.
   • Tax benefits. Taxable bonds generate interest income that is taxed at ordinary income rates (federal and state), especially if the bonds are sold for a profit before maturity. But if the investor holds a bond until maturity, they avoid capital gains tax since their return is considered a return of basis, not a gain. Investors can also eliminate income taxation on bonds by investing solely in Treasuries (which are not taxed at the state or local level) and municipal bonds (which are tax-free at the federal and sometimes at the local level).

7. Bond funds offer no control to individual investors. Unlike with individual bonds, investors cannot hold the bonds inside a bond fund to maturity or sell them prematurely if they wish. Further, bond fund returns are unpredictable. The income will vary depending on the mix of holdings based on coupon rates at the time of purchase. The greater the interest rate volatility, the wider the range of monthly distributions will be. Just know that funds buy and sell their holdings based on interest rate movements and capital inflows and outflows. Most investment managers hold bonds to maturity inside their fund. However, because of the fund’s broad diversification, the bond maturities will vary depending on the date of purchase. However, bond funds offer several advantages:

1. • Diversification. Which is very hard for smaller individual investors to achieve. Bond funds hold a large portfolio of investments, which mitigates the impact of defaults.
   • Liquidity. While an investor can sell individual bonds, a process is involved, and it may take time to find a buyer. With a bond fund, investors can typically liquidate their holdings within one day.
   • Lower transaction costs. Bid-ask spreads are typically larger for small transactions, which can translate to lower returns. Institutional asset managers, which buy and sell large quantities of bonds, can command higher prices for sales and lower prices for buys, which can add up to a transaction cost advantage over individual bond portfolios.
   • Professional management. Fund managers can find opportunities to buy bonds at a discount to take advantage of interest rate flow, which is very hard for individual investors to do.

Conclusion

In the final analysis, bonds are an important financial instrument for building a predictable income strategy for investors. Still, it is essential to understand that what is seen is not always what investors will get.

Key Findings:

• 44% say they currently have a plan for how they will take income in retirement
• 48% worry they will live too frugally and not enjoy retirement as much
• 45% worry about how to best take distributions from their retirement savings for

retirement income

Many Americans lack a plan for how they will draw from their retirement savings for income in retirement and worry about the funds lasting for their lifetime, according to the 2024 Annual Retirement Study done by a major life insurance company.

According to the study, “Without a solid strategy, the ongoing process of deciding how much money to withdraw from which account when can be daunting.” Less than half of all Americans nearing retirement (44%) say they currently have a plan for how they will take income in retirement. Boomers (67%) are more likely than Gen Xers (30%) or Millennials (33%) to say they have a retirement income plan.

“If you don’t know how you will draw from your retirement assets for income, then you aren’t ready to retire,” said Kelly Lavigne, VP of consumer insights at a major insurance company. “So much of retirement preparation focuses on accumulating assets – and that’s important – but it is critical to understand how those assets will be able to fund your life after you retire. To do that, you need to make important decisions like when to start claiming Social Security and examine what resources you have to fund your retirement.”

Nearly half (48%) worry about living too frugally and not enjoying retirement as much as they should. “Without a solid strategy, the ongoing process of deciding how much money to withdraw from which account when can be daunting,” Lavigne said. “A retirement income strategy will help reduce the number of ongoing decisions you need to make. One way to help reduce the number of decisions you need to make about retirement income is to incorporate an annuity into your portfolio that offers guaranteed lifetime income.”

What are the top risks to retirement income?

Americans identified the greatest risks to their retirement income. Ranked in the top three risks to retirement income were:

• Inflation – Everyday costs increasing (42%)
• Outliving money (35%)
• Health care costs (32%)
• Stock market dropping (31%)
• Unexpected expenses – Spending too much and running out of money (30%)

The question always comes up whether a financial professional can provide meaningful benefits to their client when evaluating retirement income strategies. What is the best way to take distributions? Studies show that 45% of Americans worry about how to best take distributions for retirement income. Is there a best way? In our opinion, the answer is a resounding yes. The Wealth Teams Retirement Solution can identify the best mix of fixed, equity, and alternatives to build a consistent, stable income that will last through retirement.

“When figuring out how to draw from your assets for retirement income, you want to include risk mitigation strategies that can help address worries about running out of money, the impact of inflation, how to reduce taxes, and managing the rising health care costs, especially long-term care,” Lavigne said. “That strategy may include incorporating an additional source of consistent, reliable, and possibly increasing income. A financial professional can help create a strategy for how to effectively turn your retirement assets into income that can last a lifetime.”

This 2024 Annual Retirement Study was conducted using an online survey in February and March 2024. The sample size was 1,000 individuals who were age 25+ in the U.S. with an annual household income of $50k+ (single) / $75k+ (married/partnered. Another criterion was investable assets of $150k+. The study included an oversampling of Black/African Americans (416 responses); Hispanic (398 responses); Asian/Asian American (366 responses).

Increasing income potential provided through annuities that offer a built-in or optional Income Benefit riders increase income with market growth. These riders have an additional annual rider fee.

Annuities can help meet retirement goals by providing tax-deferred growth, a death benefit during the accumulation phase, and a guaranteed income through retirement. Plus, many have a two-times multiplier for long-term care on the guaranteed income. If having a guaranteed income is important to the investor, then an annuity should be considered.