Don’t Jump the Gun and Panic About the Fed (Yet)!

Mike Larson

In the just-released issue of High Yield Investing, I likened this market to Arnold Schwarzenegger’s character in the Terminator. No matter what you threw at it, it couldn’t be stopped!

Now, the Federal Reserve has just embarked on a “Great Unwinding” (as the Wall Street Journal put it). Policymakers announced last Wednesday that they would start letting the Fed’s gargantuan, $4.5 trillion portfolio of Treasury and mortgage bonds “run off.” They’ll do that by reducing the amount of new bonds they buy with the money that comes in from old bonds that mature.

They’re going to start slow and small — just $10 billion in bonds per month for the initial quarter, beginning in October. Then they’ll gradually increase that shrinkage pace toward $50 billion per month. Combined with the four short-term interest rate hikes we’ve seen so far, the run off news has some pundits panicking about the Fed.

Me? I’ll go back to the same general message I’ve shared here in my Weiss Ratings updates before (and gone into much greater detail about for subscribers to High Yield Investing and my educational course How to Pile Up Profits from the Greatest Interest Rate Cycle in 5,000 Years)

1. Fed rate hikes — and in this case, balance sheet run downs — do have an impact on everything from bonds to stocks to currencies to commodities. That’s clear from my research on more than four decades of interest rate cycles. But …

2. That impact varies depending on which phase of the hiking process you’re talking about. Or in plain English, different asset classes behave differently at different points in the cycle! So …

3.You can’t just freak out at the first sign of a rate hike or the first announcement of an asset purchase tapering. If you dump everything, you’ll be making exactly the WRONG move at the WRONG time.

My work tells me we haven’t gotten far enough into this hiking cycle to panic about the economy or the stock market. That’s a key reason why I’ve been hammering home a bullish message on many, many sectors throughout most of 2016 and 2017.

Yes, rates will rise high enough to “bite” at some point. Yes, asset purchases will tail off so much that it proves disastrous to many stock investments. But you don’t want to jump the gun.

Here’s another chart you might find useful to illustrate my point. It shows the output of an economic model from the New York Fed, one that uses bond market yield inputs to estimate the probability of an economic recession over the next 12 months.

You can see that it’s hovering at only around 10% now. Sure, that’s up a bit from a couple of years ago. But it’s nowhere near the 40% to 50% readings we saw heading into and during the 2001-2002 “Tech Wreck” and 2008-2009 “Credit Crisis” recessions. That’s just one of many reasons why I remain sanguine about my favorite stocks and sectors.

Trust me. If I think the Fed (or any other force) is going to run this market off a cliff … and your hard-earned capital go up in smoke … you can be darn sure I’ll shout it from the rooftops. That’s what I did when the housing crisis was looming, and on other occasions as well.

But this is not (yet) the time to panic. Instead, it’s a great time to keep focusing on highly-rated, higher-yielding stocks, ETFs, and other investments that can boost your income and your returns in a world where the federal funds rate is STILL stuck around 1%!

Until next time,

Mike

 


Mike Larson, Senior Analyst

ETF Spotlight Edition, by Mike Larson, Senior Analyst

Mike Larson is a Senior Analyst for Weiss Ratings. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, As-sociated Press, Reuters, CNNMoney and many others.

About the Income & Dividend Analyst

In an era of high-risk exuberance, Mike Larson stands out as a leader in conservative investment strategies that outperform the market overall. Using the safety-oriented Weiss Ratings as a guide, he has a proven history of guiding investors to stocks and ETFs that provide asset protection, consistent dividends and excellent growth.

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