Investors, start your engines. The economy looks to have entered a "New Age" in the weeks after the U.S. presidential election and the Dec. 14 Fed interest rate hike, says Craig Laffman, Director, Fixed Income Trading and Syndicate, TD Ameritrade.
Some markets—including the S&P 500—rose into uncharted territory in recent weeks and investors have had a lot to digest. JJ Kinahan, Chief Strategist, TD Ameritrade joined with Laffman and Matthew Sadowsky, Director of Retirement and Annuities at TD Ameritrade to offer perspective on the recent market events, in a post-Fed meeting Market Update webcast moderated by Ben Watson, Investools instructor.
The TD Ameritrade experts covered a broad array of topics and included live chart commentary of the S&P 500, some options tools, the financial and technology sectors, crude oil, gold and more.
On December 14, in a widely anticipated move, the Federal Reserve hiked the federal funds rate up by a quarter point. This marks the first rate increase in 12 months, and it may open the door to a series of rate hikes in 2017. The central bank telegraphed intentions for three rate hikes in 2017, but currently the market is pricing in only two, noted Laffman.
The Election and Fed Rate Hikes Are Game Changers
The financial markets have reset expectations about what could lie ahead in 2017 and this gives investors the opportunity to review their portfolios to see what adjustments may be appropriate now.
"If anybody had expectations about what would transpire in 2017 and they wrote it down on a piece of paper prior to November 8, crumple up that paper and throw it away," Laffman says. "Expectations have changed. This market is pricing in growth and pricing in inflation."
Now is a good time for investors to consider the impact of rising interest rates on their overall portfolios, the panel of experts said. Treasury yields have surged dramatically higher since the election. "It's hard to argue that we aren't in a period of rising rates," Laffman says.
Understand Your Fixed Income Investments
Bond investments can be confusing, but the important feature to understand is that bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall, Laffman offered up in this basic primer. Not all bonds are created equal. One way that investors can look at a bond is that it is an IOU, Laffman explains.
Here's an example. If an investor purchases a 5-year bond for $1000 that pays a 2% interest rate—each year the investor will receive 2% in interest. If they hold it until maturity, the investor will receive the $1,000 back from the issuer.
Investors need to understand that "there will be price variations as they hold the bond," Laffman says. He highlights several potential factors fixed income investors should consider: 1) who is the issuer, 2) what is the credit risk, and 3) what is the interest rate and how does it compare to similar securities in the marketplace.
For the Long-Term Investor
Some long-term investors may have looked at the recent price run-up and thought, "How do I get in? Have I missed the move?"
The key to long-term investing is that you should be in the market and you should be diversified, Sadowsky says. For long-term investors planning for retirement, it's not only about diversifying across asset classes, but diversifying income sources, he says. That may include Social Security, a pension, or some type of annuity. Of course, asset allocation and diversification do not eliminate the risk of experiencing investment losses.
"Having a guaranteed income source at the base, might give you empowerment to allow you to take more action with your portfolio and perhaps even stay in the market longer," Sadowsky says.
Short-Term Traders: The Trend Is Your Friend
The panel of experts honed in on the financial sector, which has rallied soundly in recent weeks.
Financial stocks seem to have benefited from expectations of rising interest rates. "Financials should lead the way when rates move higher. They benefit from the traditional banking function, which includes lending out money at a higher price – that is in part how they make money. But, they have found ways to increase profits and keep expenses in check as their industry went through a tough time in recent years," Kinahan says.
Parting words: Take the time to understand the market you are trading and how other markets around it could impact it. Financial markets are intertwined and interconnected.
"All trading is really about relationships. Sometimes people look at their investments in a vacuum. No matter what you invest in there are other things around this affecting the value of your investment," Kinahan says.
For daily commentary and outlook follow JJ on Twitter at @TDAJJKinahan