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The entire world is waiting for the outcome of the Federal Reserve meeting this afternoon in what must be the most widely anticipated — and over-analyzed — event of this year.
Will the Fed raise rates for the first time in nearly a decade … or will they blink … again?
Based on the pricing of Fed Funds futures contracts, investors think there is less than a 25% chance the Fed hikes rates today.
On the other hand, 50% of economists surveyed by Bloomberg said they expect the Fed WILL make a move.
Who’s right? Tune in to CNBC today shortly after 2pm Eastern Time to find out. But either way, the lack of consensus means you can expect plenty of short-term market volatility in response to the Fed’s decision today.
Meanwhile, stocks have traded quietly and in a narrowing range over the past few weeks with investors paralyzed by uncertainty.
This wedge-like pattern of lower highs and higher lows shown in the chart above is a classic sign of indecision on the part of investors and is often a prelude to a major breakout — either up or down.
But be forewarned that the market’s first move could be just a head-fake, which quickly reverses in the opposite direction.
No one knows what the Fed will do later today, so it’s impossible to handicap the likely direction stocks will take afterward. But do investors really have so much to fear from higher interest rates?
Using history as a guide, the short answer is no. In fact, rate hikes have historically boosted stock returns.
If you look at the last six Fed Funds rate tightening cycles, the S&P 500 Index posted above average gains of 9.8% on average nine months after the first Fed rate hike. That’s well ahead of the average 9-month gain of 7.2% for all periods going back to 1983!
Another interesting fact about past rate-tightening cycles is they are often accompanied by subtle shifts in market leadership. New sectors and stocks rotate to the top of the leader board.
As you can see in the graph above, one of the best top performing stock market sectors after the start of a Fed rate tightening cycle is technology.
Six months after the Fed starts raising rates, tech stocks gain about 14% on average, outperforming the S&P 500 nearly 70% of the time.
And nine months after interest rates start rising, technology stocks are up about 20% on average, beating the S&P 500 60% of the time.
But not only are technology stocks typically the best place to invest post-Fed, they are also undervalued at the moment thanks to the recent stock market correction.
Valuations have fallen substantially, making tech one of the two cheapest sectors of the market right now relative to the S&P 500 Index, healthcare is the other. In fact, the current under-valuation of tech stocks relative to the S&P implies solid upside potential from here.
And despite recent market turbulence, several leading technology stocks still merit buy-ratings, including: Apple Inc. (AAPL) and Skyworks Solutions (SWKS).
Outside of tech stocks, other sectors that consistently outperform the S&P 500 after the Fed begins raising rates include energy and industrials.
Whether or not the Fed makes its first interest rate move today, or later this year, rates are bound to rise soon. Once the Fed starts that process, history says stocks can continue to outperform, and for my money these sectors are worth consideration for the best upside profit potential.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
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There seem to be a lot of people saying that today the Fed makes their most important decision they have made in a long time, but the most important decisions they made were the wrong ones made over the past several years that created this mess in the first place and then kept us in it far too long to now make today’s decision a hopeless one. God Save the Queen.
When you have one foot on each side of the fence, the barbed wire is not in a very comfortable place should you slip either way.
The problem with the FED’s ability to raise rates is that if the FED raises rates: the government will not be able to maintain its debt repayments without money printing. If we don’t raise rates, we are money printing through increased deficit spending. If we raise rates, we money print to pay our debts. At this point, there is no way out for the FED. We are destined to hit a hyperinflationary depression soon, and the world will follow in our footsteps. Invest in Russia, whose money is tied to oil, rather than any other nation, whose money is tied to their own debt. No one is talking about Russia: that should be your first sign that it would be prudent to invest there.
What sectors, other technology, could do well after the Fed starts to raise rates?
The bottom line is demographics. THE safest place to put your money is into either direct healthcare or into housing for the elderly as this country is about to be swamped by folks needing both in greater and greater amounts and unless required euthanasia at say age 70 is voted into law there is simply no way of getting around this simple demographic. Supplying care for and housing for the elderly will simply have to be a growth industry for a number of years to come.
There is also a little known “baby boom” that has been ongoing. Not a huge one but one larger than the norm in this country be it from immigrants or from “natives”. Both lead me to believe that investing your money in health related products or housing for the elderly or for hospital/clinic building is a very safe way to go. If money gets tight BELIEVE me there will be “arrangements made” to fund development for funding the building of healthcare infrastructure. Toss in all the increased need for healthcare providers and new medicines and it seems to me that investing in healthcare in some form is a no loss formula for keeping your investments safe. There may be a dip or two short term, but reality is reality. Even politicians won’t get in the way as they realize who makes up the highest percentage of people that turn out to vote………..the elderly. Also people that are disabled with little else to do will also turn out in droves to the Polls where politicians focus ALL of their attention (when not looking to milk their constituents).