We can predict the future.
This article is being written before the Fed meets for its June interest rate decision.
And we can say with 100% CERTAINTY that the Federal Open Market Committee (FOMC) will make the wrong decision.
How could we possibly know this?
Despite a show of independence, the Fed, and especially Chairman Jerome Powell, do exactly what the market tells them to. Otherwise, they get put in time-out.
Interest rates should be far higher than they are now and should have been raised much faster.
However, market and political interests kept the Fed from doing what it needed to, leaving us between a rock and a bunch of freaked-out bank CEOs.
No one can stop the interest rate train that’s headed our way. Yet, the financial news networks continue to stir up bullish sentiment amongst impressionable retail investors, convincing them to jump in just as the market’s about to top out.
Calling a “market top” probably sounds a bit alarmist. But the truth is that the Fed is out of options. It has backed itself into a corner, and it’s only going to get worse from here.
We fully expect another bear market cycle by the end of the year — a 20% or more drop. Does that sound like a big drop? Well, that would take us back to the lows from last summer…
But what if we told you that all it takes is three stocks to beat the market…
…a three-stock portfolio that avoided devastating losses during every bear market from the 2000 dot-com crash to the 2022 COVID-19 panic…
…but also does incredibly well during bull markets.
We know it sounds like a “moderate” politician trying to play both sides of the fence.
However, once we explain how a “Perfect Portfolio” fits into our current outlook, you’ll understand exactly why it’s the “Perfect Choice.”
Inflation is Down But Far From Out
Right before the Fed meets, we will get our monthly look at inflation through the Consumer Price Index (CPI).
Most headlines boasted the 4% annual rate of inflation, the lowest in over two years.
Strip away the sunshine and pixie dust, and you’ll see things aren’t all that rosy.
Energy prices helped bring down overall inflation quite a bit. Food’s insane 6.7% increase partially offset that.
Strip away food and energy, and you’re still left with core inflation up 5.3% year-over-year (Y/Y) and 0.4% month-over-month (M/M).
And guess what?
We’ve been at 0.4% all year!
Annualized, that’s 4.91%.
Shelter, the terrible approximation for housing costs, is up 8% Y/Y and 0.6% M/M.
Given our housing shortage, that number isn’t going to go down anytime soon.
According to the National Association of Realtors, the existing housing supply sits at 2.9 months.
While that’s off from the worst post-pandemic levels, it’s still far below the typical 3.5-4.0 months pre-pandemic.
Inflation cannot subside until this and every other market reaches equilibrium.
Why Rate Hikes Must Happen
In economics, equilibrium occurs when supply equals demand. Both supply and demand increase or decrease as price changes based on elasticity.
Elasticity is the amount of change you see in supply or demand based on a change in price.
Certain drugs are elastic. We need them to live. You can raise the prices a lot before demand falls off.
Eating out at a specific restaurant is fairly inelastic. Price changes quickly influence our decisions. We can choose another establishment or eat at home.
Normally, when prices go up, demand drops as supply increases. No one wants to pay more, but suppliers are happy to sell more.
That’s what makes our current economy so unique.
All the supply chain disruptions that broke during COVID-19 were never repaired.
Think about how often you saw a product sold out in the grocery store before 2020 and now.
Back then, it was rare. Now, you expect there to be a few items out or restricted on the quantity you can purchase.
And we know the prices for most goods are higher. But suppliers can’t just turn on the faucet and make more.
Our government failed for years to establish balanced trade practices, instead opting for global trade on unequal footing with countries like China that heavily subsidize their industries.
After being cut off from our main manufacturing supply, we’ve been forced to look inward and rebuild our own needs.
This has pulled forward construction projects on top of the free money rolled out by Washington. Unfortunately, most of these won’t come online for years.
All this has done is stoke demand. It’s done nothing for supply.
And the Fed, as powerful as it is, cannot really influence supply.
So, their only recourse is to hike interest rates high enough to choke off demand — a twisted irony given the current administration’s predilection for government handouts.
The end result: interest rates likely north of 7%.
Protecting Your Wealth
When market expectations misalign with reality it leads to one word: volatility.
Knowing this, how do we act to not only protect our wealth but capitalize on these contrarian views?
Let’s go back to the three stock portfolios we discussed earlier.
We know diversification reduces the risk of any one stock upending your returns.
What people don’t tell you is that too much diversification adds market risk, essentially making your portfolio act more and more like a stock index.
That’s not what we want when we can see a gap between market bulls and reality that’s wide enough to crash a 747-MAX through.
That’s the brilliance behind the “Perfect Portfolio.”
Jim Woods, one of the most talented stock pickers out there, focuses on three stocks that aren’t just high-quality but low volatility.
It’s that combination that helped this stock trifecta outperform the S&P 500 by MORE THAN 1,400% over the last two decades.
Don’t take our word for it.
CLICK HERE to see how just three stocks could CHANGE EVERYTHING!
