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Making Long-Term Market Assumptions is a Slippery Slope

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February 10, 2015

One of the first things they teach you in journalism school is to never assume anything, because—and we’ll clean this up for a family publication—you’ll make a “fool” out of “u” and “me.”

The principle certainly applies to the financial markets and global economy, and more specifically to the greased pig that is the protracted saga with Greece and the rest of the troubled eurozone.

Renewed concerns over a potential Greece exit from the currency union raise a number of tricky questions for investors and traders. These questions include the assumption that the U.S. Federal Reserve will hike its benchmark short-term interest rate around June (a prospect seemingly bolstered by a stronger-than-expected jobs report last week).

Hold the phone, said JJ Kinahan, chief strategist at TD Ameritrade, who noted that further deterioration in the eurozone will reverberate across the financial system. And from the Fed’s standpoint, “it’s hard to raise interest rates if there’s instability in other parts of the world,” he said.

If the situation in Europe worsens, people will increasingly funnel money to the relative safety of Treasury bonds and other similar U.S. assets, further driving down yields. Early this week, the 10-year Treasury yielded about 1.95%, up from a 21-month low of 1.67% at the beginning of February.

It’s plausible, Kinahan said, the 10-year yield may be as low as 1.25% to 1.5% later this spring, around the time the Fed is expected to raise rates (see Perspectives on Investing this week for reasons the Fed may not hike rates).

Broadly speaking, many of the assumptions we’ve made about markets, interest rates, and other things in the last few years have turned out to be misguided or just plain wrong. Anyone who’s based a portfolio or trading strategy on a six-month outlook likely has at least a few regrettable moves, Kinahan said.

That makes it imperative to maintain a focus on the here and now and not get too far ahead of yourself.

“Trade what’s out there” right now, Kinahan said. “Don’t trade out till June. There are such huge macro issues. It’s very hard to predict. Trade what’s here next to you. The closer you can come to something [an expected event], the better you can predict.”

In terms of specific investing or trading opportunities, a low-rate outlook will probably continue to enhance the appeal of stocks that pay high dividend yields, Kinahan said. (The Stock Screener on tdameritrade.com can help identify equities based on yields and other factors; see figure 1.)

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FIGURE 1: SHORT-LISTING.

Use the Screener, located under Research & Ideas (yellow circles) on tdameritrade.com, to narrow down lists of stocks based on dividend yields (yellow arrow) and other factors. Source: TD Ameritrade. For illustrative purposes only.

And for more on the here and now, Kinahan said he will be watching the January U.S. retail sales report, scheduled for release February 12, for confirmation of last Friday’s strong employment numbers.

Retail sales numbers need to meet or exceed analyst expectations, Kinahan said (sales are expected to decline 0.5% based on the Briefing.com consensus forecast). “If we do have all these jobs created … you want to see people out buying day-to-day things.”