The Fed’s Talk to Raise Interest Rates Again Would Make the Stock Market Dangerous
We’re all creatures of habit. It’s wired into our DNA. When we find something that works, we keep doing it.
But that’s a problem for all of us as investors. Especially now.
The stock market has risen more than 20% in four months. I was one of the people telling you to buy this market back in January when I said: “Keep Calm – This Market Will Rebound.”
And so it has.
If you bought any of the stocks hit hard last fall — anything speculative, as well as old standby tech stocks like Apple, Amazon, Facebook, Microsoft and Netflix — you did really well. Congratulations.
But old investing habits — what worked well in the past — often won’t work so well in the future.
Are You Prepared for Change?
One of the foundations of this market rally was the Federal Reserve. Late last year as the stock market fell 20% and Wall Street worried the economy was falling into another recession, the Fed made clear it would pause on hiking interest rates.
Investors loved that news. It provided the support the stock market needed to move higher once again.
But it’s now five months later, and a lot has changed:
- The stock market is much higher, of course.
- No one on Wall Street worries anymore about a recession.
- In the jobs report for April, the unemployment rate fell to 3.6% — a 50-year low.
- America’s gross domestic product growth in the first quarter was more than 3%.
Strong economic data like that won’t keep the Fed on the sidelines for much longer.
At some point soon, Fed Chairman Jay Powell and his central bankers will want to start raising interest rates again out of fear that the U.S. economy could overheat.
This is where old habits come to hurt us.
Investors aren’t prepared for this change. What’s leading the market now — tech stocks and speculative stocks — won’t be leading the market in a few months’ time.
Rising Rates Are Part of the Market Conversation Again
It’s not just me who’s saying this, by the way.
For instance, respected Goldman Sachs strategist Abby Joseph Cohen recently said: “Investors need to get it into their heads that the period of low inflation, low interest rates and monetary policy providing nothing by stimulus — is over.”
What she’s really saying is: Taking lots of risk with your investments isn’t going to pay off as well in the future as it has in the past.
That doesn’t mean we’re headed for a bear market. It just means be smart about the stocks you buy.
For instance, take the stocks I have in the Total Wealth Insider portfolio:
- A few of them are tech, but they’re undervalued.
- A few of them are growth stocks, but they’re not the super popular growth stocks everyone owns already.
- A few of them are emerging-market stocks, which aren’t popular at all right now. That’s a good thing since we can buy them super cheap. One of them is already up 33% in three months.
So watch out that your old habits — what worked for you in the past — don’t become a headache for you as rising interest rates become a part of the market conversation again.
Editor, Total Wealth Insider