Optimism often predates good news. Such was the case last year when, just before the end of the year, Congress passed legislation that significantly reduced the corporate tax rate. The anticipation of this fulfillment of one of President Trump’s pro-business campaign promises helped drive up stock prices in the latter half of the year — to the tune of a 24 percent uptick. In other words, the expectation for lower tax rates was already baked into market assumptions for 2017.1
Now the question is, what will happen in 2018? According to one market analyst, a challenge for this year’s equity markets will be the likelihood of the Federal Reserve raising interest rates further. If the economy grows by 3 to 3.5 percent this year, as the analyst predicts, this could trigger higher interest rates. Ultimately, higher rates can put a damper on stock prices and make bonds and CDs more attractive.2
We like to remind our clients of a couple of rules of thumb when it comes to managing an investment portfolio. First of all, remaining diversified is generally an effective way to help capture gains, reduce risk and work toward long-term goals. Second, bear in mind that what matters is overall portfolio performance, not individual sectors or investments.3 If you’d like help reviewing your current asset allocation strategy to make sure it’s aligned with your objectives, tolerance for risk and investment timeline, please contact us to schedule a consultation.
Remember that as interest rates rise, bond prices generally drop. However, as long as rates rise modestly and gradually — which is what the Fed projects — bond investors can still make money via their total return.4
The general forecast is for the Fed to increase the federal funds rate within a range of 2.75 to 3 percent by the end of 2018. With that said, note that there are some positives associated with higher interest rates, especially for retirees who rely on low-risk, fixed-income investments for income. Higher rates also could improve the pricing of annuities and credited interest rates.5
1 Knowledge@Wharton. Jan. 2, 2018. “Jeremy Siegel: What’s Ahead for the U.S. Economy in 2018.” http://knowledge.wharton.upenn.edu/article/jeremy-siegel-whats-ahead-u-s-economy-2018/. Accessed Jan. 8, 2018.
2 Ibid.
3 Mike Loewengart. Etrade. Jan. 2, 2018. “Putting a bow on 2017 with a turn to the new year.” https://us.etrade.com/knowledge/markets-news/commentary-and-insights/putting-bow-on-2017-with-turn-to-new-year. Accessed Jan. 8, 2018.
4 Jeff Benjamin. InvestmentNews. Jan. 6, 2018. “2018 outlook in bond investing calls for change.” http://www.investmentnews.com/article/20180106/FREE/180109957/2018-outlook-in-bond-investing-calls-for-change. Accessed Jan. 8, 2018.
5 Mark Miller. Morningstar. Jan. 9, 2018. “Retirees: What You Should Watch in 2018.” http://news.morningstar.com/articlenet/article.aspx?id=842831. Accessed Jan. 9, 2018.
Content prepared by Kara Stefan Communications
The hypothetical example provided is for illustrative purposes only; it does not represent a real-life scenario, and should not be construed as advice designed to meet the particular needs of an individual’s situation. We are able to provide you with information but not guidance or advice related to Social Security benefits. Our firm is not affiliated with the U.S. government or any governmental agency. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by company. Annuities are not a deposit of nor are they insured by any bank, the FDIC, NCUA, or by any federal government agency. Annuities are designed for retirement or other long-term needs. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.
