Interest Rates Add Spice to What’s Already a Stock Picker’s Paradise

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

To hear some investors talk, you’d think Treasury yields above 1.7% were a clear sign of the end of the world approaching.

But history proves it takes a lot more than this to shake Wall Street’s confidence. Late in 2019, when volatility was unusually low and there were few clouds on the market horizon, bonds paid 1.9% and nobody blinked. You couldn’t even get one-month bills that paid less than 1.48%.

If you’re reading this now, you somehow managed to survive that rate environment. I suspect you’ll survive this one as well.

And we’ll do more than survive. I just told participants on an exclusive conference call that the market as a whole may be in for a stormy season, but active stock pickers who can focus on strength and avoid weakness are in a much sweeter spot.

Listen to the recording and hear for yourself. (Click here.) This is actually a stock picker’s paradise. We have everything we need to make a whole lot of money in the immediate future.

Stocks Are Not Bonds

The fact is that bad news for bonds is not always bad news for stocks. In my career, the relationship is usually more antagonistic: stocks go up as bond yields go up, bond prices go up as stocks go down.

Bond prices are going down because the world is waking up to what I’ve been saying for over a year. Treasury debt that pays less than the Fed’s inflation target isn’t a sound investment unless you are absolutely terrified of anything riskier.

There’s $21 trillion parked in Treasury bonds right now. A year from now, if the Fed gets its way, it will be worth at least 0.7% less, and inflation might take a bigger bite before prices stabilize.

Is it any wonder that people are selling bonds to roll their money into anything with at least a chance of providing a positive real return? As they sell, bond prices drop. As bond prices drop, yields rise.

This is some of the most basic market math that exists. The Fed is not worried about demand for bonds declining to this point, even though it means the cost of borrowing in the long-term nudges upward in the process.

The housing market is already booming. Mortgage underwriters and building contractors have more business than they can handle. Higher mortgage rates won’t raise an immediate wall there.

And as for Wall Street, people don’t exactly borrow at long-term rates to buy stock on margin. As the long end of the yield curve steepens, hot money remains hot. That’s the Fed’s objective here.

Should Fed Chairman Jay Powell and his cronies notice the economy freezing over, they’ll buy enough bonds to get rates back into their comfort zone. It’s really that simple.

If anything, investors selling bonds today lowers the ultimate price of that theoretical buyback. When you’re managing a $21 trillion market, even a slight fear discount adds up to real money.

Individual Stocks Are Not ‘The Market’

Exclusive  The Kindness of Capitalism

Meanwhile, stocks are the only asset class with even the potential to stay ahead of inflation. Corporate executives are nimble and innovative. They constantly figure out how to keep cash flowing.

Some successfully execute, and their shareholders are rewarded. Others don’t fare as well as economic conditions evolve.

On the whole, the market looks ready for fresh leadership as pandemic disruption recedes and new post-vaccine dynamism takes over.

The stocks that rallied so hard last year got ahead of themselves. They need to rest. That means Apple Inc. (NASDAQ:AAPL), Inc. (NASDAQ:AMZN) and the rest of their Big Tech counterparts may underperform investor expectations.

Free Fed money meant that fast-growing tech stocks could justify valuations that wouldn’t add up in any other economic environment. In a real way, we saw the opposite of a flight to safety drive these stocks last year, and now it’s unwinding.

Back in the depths of the pandemic, investors lost confidence that the brick-and-mortar world would ever recover, so all the money crowded into a handful of companies that thrive in a virtual environment.

Now it’s time to widen our focus. Meanwhile, an entire generation of new stocks has emerged with the potential to disrupt even the entrenched Silicon Valley leaders.

It is time trillion-dollar companies let go of their market grip. But the problem there is that just a handful of Big Tech stocks now dominate all the major indices.

They’re simply too big for the market as a whole to overcome their dead weight. That’s why I’m having a lot more success trading individual stocks and letting “the market” go its own way.

So far, despite “the market” and its gyrations, we’re making money. And it’s still in the very early stages.

My Triple-Digit Trader follows the heat: crypto currencies, cannabis, e-sports, electric vehicles. One way or another, these companies reflect the future. Pick the right ones and you won’t even notice what the market as a whole is doing.

And then there’s my IPO Edge, where only the newest stocks get their chance to shine. You won’t find AAPL or AMZN here, but you might catch the trillion-dollar titan of tomorrow.

And as always, we trade the controversy. I’m talking about all of this on my Millionaire Makers radio show (Spotify)(Apple) and video channel (YouTube). Subscribe now so you never miss an episode… or an opportunity!

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