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.
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.
Bond obligations are subject to the financial strength of the bond issuer and its ability to pay. Before investing consult your financial adviser to understand the risks involved with purchasing bonds.
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