It’s All Thanks to the Fed
When I was in school back in North Carolina, we always wished for snow to cancel a day or two of class, like I am sure many students in the Northeast have been wishing for lately. While we were excited to miss school for a day and play in the snow, we often overlooked the repercussions of missing several days.
Eventually, these days would have to be made up. That usually meant taking a day out of our spring break, resulting in less days of sun and fun at the beach. We should have been careful what we wished for.
Right now, investors are likely saying the same thing: They should have been careful about what they wished for…
An interest-rate hike was on almost everyone’s wish list in 2015. And by the end of the year, investors got exactly what they wanted: the first interest-rate hike in nearly a decade.
Jump forward to today, and the markets have reacted nervously. Since the start of the year, the S&P 500 has retreated more than 8% and the Dow Jones Industrial Average is down over 10%. Only gold has been a bright spot, with its 3% gain.
Maybe investors should have been a bit more careful about what they wished for. They clearly weren’t prepared for the repercussions that accompanied their wish.
In the end, a rate hike isn’t the answer investors were looking for, and that tells me low rates are here to stay. Here’s why and what you can do to collect income today.
More Fed Drama
Since December 16 — the day the Fed announced it would increase interest rates — stocks have plummeted and the CBOE S&P 500 Volatility Index (VIX), also known as the fear index, has spiked nearly 30%. All this volatility in the market has pushed investor expectations for the next rate hike out until the second half of the year. In fact, Wall Street is placing the odds for another rate hike at only 60% for next December.
But the Fed has stated it plans to hike rates several more times this year.
This difference in expectations will fuel more volatility for the markets, which is not an environment the Fed will want to keep increasing rates in.
If we see one more rate hike in 2016, I think that would be a stretch. In fact, Jeff Opdyke believes the next move the Fed makes will likely be a rate cut.
The Atlanta Fed tracks GDP fairly accurately by compiling the data as it comes in, and right now, it pegs fourth-quarter GDP at 0.8%, well below the 2% consensus on growth. And an interest-rate hike cycle from the Fed does one thing for certain: slow our economy.
It’s why rates have been so low for so long in the first place — to give our ailing economy a boost. With GDP falling below estimates and weak economic data continuing to pour in, it’s hard to see another four hikes in 2016, but that’s exactly what the market had hoped for a few months.
At this point, I’d be preparing for more easing in the economy rather than more tightening.
So, for those who were hoping rate hikes were going to translate into decent yields from traditional resources such as bank CDs and bonds, don’t hold your breath.
But instead of waiting around for yields to rise, you have a better solution already at your fingertips: selling put options.
When you sell a put option, your goal is to collect the premium, which is the price of the option. It’s this premium that you can turn into your steady stream of yield. This is the strategy we have used in Pure Income to generate sizable yields, up to 50 times the average S&P 500 yield, while interest rates have been pegged at zero.
The best part is that the strategy isn’t dependent on the Fed at all — higher rates or lower rates, Pure Income still generates significant yields. This is possible through put selling.
When you sell a put option, it means that you are agreeing to buy shares of the underlying company at a certain price, known as the strike price, by a time frame you pick.
It’s this agreement that gives someone the reason to pay us for the option contract.
And, since you are a seller of the option, that money is yours to keep no matter what happens. Consider it an advance for agreeing to buy shares of the stock at the strike price. Even if you never have to buy the stock, the income is yours.
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Editor, Pure Income