Navigating Changing Economic Tides
Moving into 2024, business leaders for tribal entities need to consider how borrowing, lending, and investing funds; purchasing and selling business lines; and employing staff or carrying inventory, each respond to changing economic conditions.
For those focusing on the larger financial impact of 2024 activity on a Tribe, understanding the dominant characteristics of your community will help you determine factors that will be most impactful to your entities as well as those of your tribal members.
Listen to our podcast episode with Paul Madrid, Election Year Economics: 2024 Financial Planning for Tribes
Preparing for an Economic Slowdown
With the Federal Reserve Board (Fed) holding interest rates steady, inflation has slowed, and an economic slowdown is expected in 2024. Recent economic data is coming in better than anticipated and many investors are starting to see an increased possibility of a soft landing occurring. The term “soft landing” describes having a slowdown in the economy, but one that does not lead to the extremes of a recession.
While we don’t know whether we’ll have a soft landing or a recession, an economic slowdown should be incorporated into all financial plans. Tribes should taper down expectations for 2024—those related both to growth for their enterprises as well as in other investments. Since we don’t expect a severe slowdown in the economy, modest projections should be used.
Inflation and Interest Rate Targets
Inflation and interest rates have been among our top considerations over the last two years as the Fed increased rates in their effort to bring down inflation. Fortunately, they were successful—but inflation is not yet where they want it to be.
The Fed’s 2% inflation target feels achievable, and many believe we’ll be there in late 2024. If we hit the target, it could spur rate cuts to bring down short-term interest rates. With that in mind, Tribes should consider the possibility of lower debt service payments on their loans with variable rates.
Fixed Income Investment Opportunities
Investment opportunities in fixed income in 2024 aren’t as generous as they were in 2023, but they remain at multiyear highs. With short-term interest rates near 5.5%, Tribes can generate additional income on their cash reserves and investments.
If we assume a Tribe takes $1,000,000 from its cash reserves and buys short-term U.S. Government Securities, that Tribe could generate about $50,000 in interest income to support the Tribe’s needs. For longer-term funds, locking in bonds at these rates may make sense—especially when anticipating an economic slowdown and the Fed cutting interest rates later this year.
Tribal leaders and CFOs should consider the Tribe’s cash flows and look for opportunities to generate interest income.
Valuations are relatively high for U.S. equities—but fixed income and non-U.S. equities are more reasonable. Most of the high valuations of U.S. equities are specific to large growth companies, while value, and small companies have lower valuations.
Given the range of valuations, Tribes should consider allocating their investments across the equity market. Before making these moves, Tribes should review their long-term objectives and perform an asset allocation analysis to see how these changes would impact risk and expected returns. Asset allocation analysis—or studies—are good exercises for Tribes to perform annually in conjunction with a review of their investment policy.
Risk Level Adjustment
With more economic uncertainties expected in 2024, risk levels are anticipated to increase. Markets tend to see increased volatility during election years, and this will certainly impact investment portfolios.
Higher risk scenarios like this can be modeled within your asset allocation analysis. Tribes may need to make some adjustments to their asset allocation targets to maintain their preferred risk tolerance level.
Trusted Expertise Serving Tribal Nations
Tribal Nations face unique challenges as they work to serve their communities. Having served Sovereign Tribal Nations for over 40 years, REDW’s experienced advisors understand and respect tribal sovereignty and culture. As fiduciary advisors, our Wealth Management professionals learn about your Tribe or tribal entity’s financial goals and are held to the highest legal and ethical standards. We are committed to serving in your best interest and finding opportunities to grow your portfolio for generations to come.
Please contact Paul Madrid, REDW Wealth Management Principal and Practice Leader, for a discussion around opportunities specific to your Tribe.
© 2024 REDW Wealth LLC. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice. Information and instruction shared in the article above do not guarantee outcomes, performance, or quality of services provided to REDW Wealth Management clients by REDW Wealth Management or its employees. Adherence to our fiduciary duty is not a guarantee of client satisfaction or any particular outcome. Advisory, Assurance, and Tax is offered through REDW LLC. Wealth Management is offered through REDW Wealth LLC.