Remember 48 hours ago, when everything looked great in the market and self-proclaimed “experts” were telling you that we were on a non-stop ride back to record-breaking rally territory?
Now those same commentators are reeling and a little stunned after one of the steepest one-day declines in Wall Street’s history. They’re desperate for someone to blame.
Quite a few are blaming the Federal Reserve. In their view, the latest monetary policy statement didn’t go far enough to soothe nerves that were still raw from the COVID-19 market crash.
I agree that the Fed contributed to the selling we saw this week. But in my view, the logic is a little more complicated… and the conclusions are actually bullish for most investors.
Brittle but Not Broken
As you know, I take a cautiously positive view of the market and the economy every week on my
“Millionaire Maker” radio show. (Click here for recorded episodes and local stations.)
This time around, we’re talking to economist Stephen Moore about what he sees out there and what the Fed should have said.
He doesn’t believe that the economy is crashing. Like me, he says we’ve already seen the worst of the quarantine damage and that people are starting to ease their recent restrictions with the blessings of their governors.
Businesses are hiring again. Construction, in particular, is rebounding. While the service sector remains depressed, the numbers are moving in the right direction there, too.
Things are bad. But they’re getting better now, not worse. That’s an important distinction.
And that’s at the heart of what the Fed said this week. Chairman Jerome Powell admits that things are bad out there. We knew that already. I, for one, applaud the honesty.
He isn’t contemplating new policy stimulus. Interest rates are already at zero, and it will take time for that liquidity to circulate through the economy.
People who wanted extra handouts are evidently disappointed. That’s their problem.
The interesting thing about the Fed’s statement was confirmation that interest rates will not rebound any time soon. In fact, we will probably be in a zero-rate world until 2022, if not beyond.
By Wall Street’s standards, that’s forever. But again, it isn’t anything new.
We knew that the Fed wouldn’t tighten again as long as the COVID-19 virus remained a threat to “business as usual.” That pushed the rate hike timeline back at least to the end of the summer.
From there, the election is only weeks away. Even under normal circumstances, the Fed hates to increase rates when people are getting ready to vote.
We were always going to be in a zero-rate environment for at least the next five months. The only thing that has changed here is pushing that timeline out into 2022.
Watch the Banks Twist
That timeline is bad news for the banks and other companies that make money on interest rates. They were already facing a challenging year. Now they’re looking at a cold 2021 as well.
Look at the way the big bank stocks performed this week. JPMorgan Chase & Co. (NYSE:JPM) is down 12% from its peak. Its peers are in a similarly battered state.
It isn’t hard to see why. These stocks are effectively dead money until the Fed sees enough economic growth to let interest rates start climbing again.
At best, JPM and its peers are now income opportunities. They’re bond replacements, a way to squeeze 3-4% yields out of your capital even if the stocks themselves go nowhere.
We see similar patterns play out in brokerage groups, where companies have slashed commissions to zero because they thought that they could make more money by simply earning interest on the cash of their clients.
Charles Schwab Corp. (NYSE:SCHW) is down 10% this week. E*TRADE Financial (NASDAQ:ETFC) has held up only a few percentage points better.
These companies may do a lot of business as the market mood recovers, but they aren’t going to make a lot of money. That’s up to the Fed to decide.
Factor out the financial stocks and the market as a whole is only down 3% this week. It stings, but it’s far from a crash.
Technology is only down a fraction of a point. Consumer stocks, utilities, health care and other sectors have stepped back without showing significant strain.
Index fund investors can’t see that strength because their portfolios are tied to the allocations that Wall Street’s rules force them to obey. They can’t avoid financials in a zero-rate world any more than they can strip energy out of their portfolios until oil prices heat up again.
But we can do that. We can capture growth and avoid weakness. And if you want my best growth opportunities, GameChangers has plenty. Or, IPO Edge may be the place to go. Click here to download my in-depth report on Draganfly’s IPO.