The June jobs report sent the U.S. unemployment rate tumbling to 5.3% — the lowest in seven years.
But the lower rate didn’t come on the back of an improved labor market. Instead, it was the reflection of people falling out of the labor force either by retiring or simply giving up their search for a job.
This continued slack in the labor market caused many analysts to lower expectations of a September interest rate hike to less than 30% — from what was a 50-50 chance just a few months ago.
But let me warn you, these expectations are always overly optimistic.
Here’s what you need to know…
Even though analysts have pushed back expectations to nearly 2016 for the first rate hike, take it with a grain of salt.
Fed members to stock market gurus have been calling for an interest rate hike since early 2011, when traders were giving a rate hike by the end of the year a 90% chance. That just goes to show you how accurate these expectations tend to be.
Next year would mark five years since analysts started calling for an interest rate hike, but the markets will continue to wait.
That reality tells us low rates are here to stay.
Two Barriers to the Interest Rate Hike
The Fed knows this reality; it’s why rates have remained near zero since 2008.
Any attempt to implement an interest rate hike puts our economic foundation at risk.
It would impair our debt-ridden government by increasing interest payments on its $18 trillion-plus debt. We already know our government is strapped for cash and an increase in interest payments would mean two things: a cut in spending (which isn’t likely) or more debt. Both of these make our country less stable and bring it to the brink of a collapse.
Another economic impact is from a stronger dollar. As the Fed moves to a normalized rate environment, it will bring dollar strength along with it because traders would pile into the dollar as a result of the higher interest rates (in comparison to much to the world) while shorting other currencies.
But a strong dollar is not healthy for our economy either. A stronger dollar will make our products more expensive overseas. And with the new Trans-Pacific Partnership (TPP) trade deal that President Obama passed, it means we become virtually obsolete in the export business — while those countries will continue to send us cheap goods.
This development threatens to cripple our jobs market and will potentially send us into a depression.
Yield at a Discount
Clearly, these are two scenarios the Fed wants to avoid at all costs, which, in turn, means rates are going to remain stubbornly low despite what analysts are anticipating.
Your hunt for yield remains in full force. And the market is giving us an ideal time to load up.
Even though the market is pricing in a late-2015/early-2016 interest rate hike, odds are it will be 2017 or later.
But, as I often mention, when the initial interest rate hike happens is not as important as the path of interest rates. We will be well into the next decade before we see any type of normalized rate environment.
Regardless of the fact that rates are going to remain stubbornly low for the next several years, investors have punished interest-rate sensitive stocks — which is why I would load up on them today.
This includes real estate investment trusts (REITs), master limited partnerships (MLPs) and utilities. These are the sectors I am currently building positions in, and you should be too.
Editor, Pure Income