The Results Are In… Why There Is No Trade Last Friday
I know the most important question on nearly every investor’s mind right now…
“Where are stocks headed since the Federal Reserve raised interest rates by 0.50% last Wednesday? Will chaos prevail?”
On March 15, 2020, the Fed cut the federal funds rate to zero and launched a $700 billion quantitative easing program to help shelter the economy from COVID-19 and keep things running without a hitch.
The fed funds rate is the interest rate financial institutions, such as banks and large investment firms, charge each other for overnight loans. Banks are required to reserve a minimum amount of their deposits to ensure they have enough cash to withstand an emergency. By setting the rate at zero, it discourages banks from holding excess reserves, which should increase bank lending and boost economic growth.
But because the inflation rate — now at 8.5% — is so high, it is the Fed’s job to “take away the punch bowl just when the party gets going,” in the words of former Chair William McChesney Martin.
The punchbowl in this instance is low rates.
It is no secret that investors tend to get nervous when the Fed tightens its monetary policy because they’re inclined to think that higher rates will be bad for stocks. I mean, it isn’t unusual to see a panic-induced, short-term market sell-off when rates rise.
Wednesday’s hike will only push the fed funds rate to a range of 0.75% to 1%.
Based on data compiled by the CME group, the market has already priced in a rate of 2.75% to 3% by the end of this year. So I didn’t find it all that unusual when the market decided to rally shortly after the Fed’s anticipated 50-basis-points hike.
The Dow, S&P 500 and tech-heavy Nasdaq jumped 2.81%, 2.99% and 3.19%, respectively, after last week’s announcement, just before giving all of those gains back the very next trading day.
But the point I want to make here is that the Fed knows if it doesn’t get inflation under control quickly, the economy and the market will struggle… which makes things risky for investors as it can be reflected in the prices of many options.
And policymakers certainly haven’t been kept in the dark about this…
As a result of these risks, I wasn’t able to find a safe Maximum Income opportunity for you last week. I also believe it is a good idea for us to preserve capital right now and wait out all of the volatility.
On a more normal week, with the strategy we use over at Maximum Income, we can collect even more income. And we can do it without taking on any unnecessary risk.
In fact, this strategy works like an “insurance policy,” protecting your capital in the event of a downturn — while still giving you the chance to enjoy some upside.
I think every investor owes it to themselves to at least learn how this works, which is why I’ve released a report that tells you everything you need to know.