They said they would do it, and they did it. And they just told us to brace for more.

The U.S. central bankers last week hiked the main interest rate for just the second time since the Great Recession. 

This 25 basis-point increase in the Fed Funds rate, which just happened to come about a year after the first one tripped up the stock market rally, was telegraphed well in advance. Almost everyone expected this result as the Federal Open Market Committee (FOMC) meeting concluded on Wednesday, Dec. 14. 

Even before the December meeting, U.S. Treasuries of all maturities came under selling pressure, with interest rates rallying. One reason was the widespread optimism about economic growth and the ensuing equity rally. Another reason was the market speculating that the economy was strong, and that economic data would mean the Fed guiding for more than two rate hikes in 2017.

In fact, it’s likely that not two but three interest rate hikes are in the cards for 2017. This is what the Fed signaled at the December meeting, and, given the latest economic data combined with policy outlook, this scenario seems plausible. 

Investors, especially income-starved retirees, have many questions: What will the market do? Where will longer-term rates go? Which sectors will outperform? How many hikes will the market be able to absorb before it stumbles? 

Subscribers to my premium income newsletter The Daily Paycheck know that while we can’t discern the answers to those questions just yet, we look at the Fed’s interest rate outlook, together with the most important fundamentals of relevant asset classes. We can use that information to analyze what’s possible, what’s likely, and what might be the best course of action for the next year. 

First off, look at the chart I recently shared with my paid subscribers…. 

Notice the sharp jump in the 10-year Treasury rate over the past month or so. In fact, as bonds sold off after the election, the 10-year benchmark yield increased by about 0.72%. Compare that to the 0.25% hike the Fed just instituted. The longer-term rates, the ones that are determined by the market forces, have clearly moved more than the shorter-term rates. 

This dynamic might be bad news for the housing market, as mortgage rates follow 10-year Treasury notes, but it’s clearly good for financials and maybe a positive for the overall economy, too. Banks borrow at shorter rates and lend at long-term rates; the recent change in interest rates (also known as the steepening of the interest rate curve) helps banks make money and possibly lend more. 

#-ad_banner-#However, despite a sharp increase in the 10-year benchmark T-note rate (one of the main interest rates in the economy), we are still quite low on a historic basis. Much of the monetary stimulus is still here, and it would remain even if the Fed hikes two or three more times. 

And it’s likely that with a Republican president and a Republican-controlled Congress, 2017 will see some additional fiscal stimulus. All this bodes well for the economy and, by extension, the stock market, despite the heightened interest rate expectations.

Moreover, I stand by everything I said to my Daily Paycheck readers in mid-September when I discussed the upcoming rate hike. 

Namely this:

For equity portfolios, the general guidelines remain the same. Diversify out of interest-rate sensitive sectors, go for quality, and maintain exposure to growth stocks or stocks that have the potential to grow dividends. 

When it comes to fixed income, be vigilant. The reason is worth repeating: By definition, bond prices have an inverse relationship to interest rates. 

However, not all bonds react in exact same way to interest rates changes.

Junk bonds, for instance, tend to do better in a rising-rate environment than their high-quality peers. That’s because several factors are at work.

First, they are usually shorter in maturity — and this alone makes them less sensitive to rates. Second, their coupons are higher. Third, their underlying assets tend to do better as the economy does better; in a sense, while investors take more credit risk, in a recovering economy it tends to pay off. 

Not everything is going to be easy in 2017 — just like as it wasn’t this year. But I believe that rational investors who stay vigilant and follow a long-term plan will continue to benefit from this market. 

If you haven’t already, I’d like to invite you to join me in navigating this new territory at The Daily Paycheck. My subscribers and I are earning thousands of dollars in additional income each month — without taking on an inordinate amount of risk. To learn how you can too, simply follow this link.