Don’t Fear Rate Hikes in 2022. Just Trade This.
Mike’s Note: Welcome to our first-ever True Options Masters Predictions Week. All week long, you’re going to hear what the whole TOM team is banking on for 2022 and beyond.We’re kicking things off today with a call from our very own Chad Shoop. An unapologetic bull, Chad thinks a lot of people are getting the market action wrong lately. And today, he’ll show you why he’s still bullish on 2022, and the one sector he thinks you should invest in to take best advantage…
They say a picture is worth a thousand words…And there’s a picture that’s worth probably hundreds of thousands of words over the next year: the relationship between stock prices and the Federal Reserve’s key interest rate. You see, the Fed expects to hike interest rates three times next year. Every time we see headlines about the Fed raising rates, it’s all negative. Investors are apparently scared that the support for the market is going away. But what these headlines fail to include is the fact that rising rates are historically good for stocks. And this chart backs that up…
Take a look at the Fed Funds Target Rate, in orange, and the S&P 500 in blue.When the target rate is making stair steps higher, we are in a rising rate economy. Look at those periods and how they correlate to the price action of the S&P 500. In the late ‘90s, the rate hikes preceded the dot-com bubble and a bear market for the S&P 500. But rates were going higher for almost a year before the market topped. And in the mid-2000s, that rate hike cycle ended and the market was still climbing. They began rising rates in 2004 and ended in 2006. The market topped at the end of ‘07. That’s a three-year bull market after rates started hiking. Even more recently, in 2016 through 2018, we saw another rate hike cycle. But during that period, the S&P 500 went up about 50%.
Bottom line, rising rates are not bad news for stocks. It’s the opposite.And once you get past the headlines and look at why the Fed is hiking rates, it all makes sense.
Bring on the Rate Hikes
The Federal Reserve only hikes rates when the economy is doing well enough to warrant a rate hike. Our current environment is the perfect example.People are still reluctant to spend and go back to normal due to the COVID-19 virus. Yet, thanks to the pumping of economic stimulus during this period along with pent-up consumer demand and a strong labor market, we’ve got the makings of a very strong economy in the years ahead. So the Fed is doing what they should — tightening economic policy. As we move into 2022, the Fed is expected to hike rates three times. And I say bring it on. The economy is thriving despite added fears of a virus and all sorts of shortages. In 2022, some of those headwinds will get smoothed out and I’m looking for broad markets to deliver another double-digit performance for the year. But the index I’m looking for the best performance from, is small caps. They underperformed in 2021 and now I’d bank on them outperforming in 2022. You can buy the iShares Russell 2000 ETF (IWM) to capitalize on another double-digit market rally in 2022. Regards, Chad Shoop, CMT Editor, Quick Hit Profits