Blame the Fed For Wall Street’s Stumble

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.
[Marriner S. Eccles Federal Reserve Board Building]

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.

Exclusive  Beware of Panic Attacks

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.

Exclusive  This One Investment Survived the Bloodbath

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.

Like This Article?
Now Get Mark's FREE Special Report:
3 Dividend Plays with Sky-High Returns

This newly-released report by a top-20 living economist details three investments that are your best bets for income and appreciation for the rest of the year and beyond.

Get Access to the Report, 100% FREE


img
previous article

Big Cannabis has had such a rough year that there just isn’t a lot of downside left in these stocks. That’s in the background of the industry’s remarkable staying power this week. But then again, good news from Hexo Corp. (NYSE:HEXO) didn’t hurt, with sales last quarter jumping 30% and management offering guidance that the growth will translate into profits within the coming year. On the surface, it’s great news. In a recession, it’s even better. So, it’s no

PREMIUM SERVICES FOR INVESTORS

Dr. Mark Skousen

Named one of the "Top 20 Living Economists," Dr. Skousen is a professional economist, investment expert, university professor, and author of more than 25 books.

Product Details

LEARN MORE HERE

Bryan Perry

A former Wall Street financial advisor with three decades' experience, Bryan Perry focuses his efforts on high-yield income investing and quick-hitting options plays.

Product Details

LEARN MORE HERE

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker,
financial journalist, and money manager. As well as a book author and regular contributor to
numerous investment websites, Jim is the editor of:

Product Details

LEARN MORE HERE

Bob Carlson

Bob Carlson provides independent, objective research covering all the financial issues of retirement and retirement planning. In addition, Bob serves as Chairman of the Board of Trustees of the Fairfax County (VA) Employees’ Retirement System, which has over $2.8 billion in assets.

Product Details

LEARN MORE HERE

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. Since 2010, Hilary's financial publications have provided stock analysis and investment advice to her subscribers:

Product Details

LEARN MORE HERE

Jon Johnson

Jon Johnson's philosophy in investing and trading is to take what the market gives you regardless if that is to the upside or downside. For the past 21 years, Jon has helped thousands of clients gain success in the financial markets through his newsletters and education services:

Product Details

LEARN MORE HERE

DividendInvestor.com

Used by financial advisors and individual investors all over the world, DividendInvestor.com is the premier provider and one-stop shop for dividend information and research.

Product Details

Popular tools include our proprietary Dividend Calendar, Dividend Calculator, Dividend Score Card, and many more.

LEARN MORE HERE