Not a subscriber? Click here to learn
more.
|
| Home | About Us | Resources | Archive | Free Reports | Market Window |
Interest Rates Likely Won't Go Above 1% in 2016By
Tuesday, December 29, 2015
The Federal Reserve says it will raise interest rates to 1.375% by the end of 2016...
DON'T BELIEVE IT!
As I'll show you today, it would be absolutely foolish for the Fed to raise interest rates very much in 2016...
The rest of the world outside of the U.S. is struggling to grow. And the U.S. high-yield bond market is sending serious warning signs today.
The most recent bout of fear in high-yield bonds (also known as "junk" bonds) was strong.
I think of the junk-bond market as the "canary in the coal mine" for the stock market and the economy...
Visualize it with me... A group of old-time miners carries a caged canary into a mine tunnel with them. If lethal gases are present in the mine, the canary will die... the miners will realize there's danger they can't see... and the miners will get the heck out!
Junk bonds are just like the canary... When the junk-bond market starts to die, the Federal Reserve needs to pay attention... There's danger ahead.
The junk-bond market has been a great "canary" over the past quarter-century... forecasting trouble and Federal Reserve rate CUTS.
You see, when interest rates on junk bonds start to rise (or more specifically, when the spread of the junk-bond interest rate over the risk-free interest rate starts to rise), it's a signal that trouble is ahead. It's a signal that the Fed should CUT interest rates. Take a look:
 The message from the chart is simple: Junk bonds tell the Fed what to do. When the junk-bond-rate "spread" starts to rise quickly, the Federal Reserve starts to cut interest rates. The Fed doesn't stop cutting interest rates until the bleeding in junk bonds has stopped. The message from junk bonds today is that times are still dangerous out there... that conditions are unsafe... and that it's time to hustle out of the mine. In normal times, the Federal Reserve would lower interest rates to ease the stress. Instead, the Fed is RAISING interest rates.
So why are the folks at the Fed raising rates? In short, because they said they would... The Fed might have lost credibility if it didn't raise interest rates. It has been crying wolf about raising rates for years.
The Fed accomplished its one goal this month – it showed us it's not crying wolf anymore. But with all the trouble in the world and in junk bonds, the Fed really shouldn't dramatically raise interest rates in 2016. It should use a cautious approach.
So even though the Fed says it will raise interest rates to about 1.375% by the end of 2016, I seriously doubt it will raise them that much...
Good investing,
Further Reading:
Earlier this month, Steve showed readers that stocks and house prices go up when the Fed starts raising interest rates. "The Fed is hiking rates for the first time since 2006 right now... But the start of a rate-hiking cycle is not a bad thing, based on history," he says. Learn why here.
If you're looking to diversify some of your investments out of U.S. stocks, Japanese stocks are a good choice today, Steve says. "From December to April, a crazy thing happens in Japanese stocks... They soar." Get all the details right here.
Market Notes2015 YEAR IN REVIEW: A POWERFUL INVESTING STRATEGY One of the world's most successful businesses is continuing its huge, end-of-year rally... and it shouldn't come as a surprise to longtime readers.
As we've explained many times over the years, if you're interested in making a meaningful, long-term stock investment, elite "stable" companies are the Holy Grail. And right now, we're seeing this at work with one of our favorite examples: McDonald's (MCD).
McDonald's is the largest fast-food chain in the world, with more than 30,000 locations throughout 100-plus countries. In the past few years, McDonald's sold billions of dollars' worth of burgers and fries... generated billions of dollars in profits... and paid shareholders large, growing dividends. To stay ahead of the competition, the company has launched an all-day breakfast menu and improved its food quality.
As you can see below, shares have been on a tear since September, up 25%... and they just touched a new all-time high. To generate consistent, long-term profits, owning proven businesses like McDonald's is a great way to go...
 |
Recent Articles
|
