Don't Bail on Today's Market Boom
A new boogeyman lurks... Finding the next black swan isn't easy... Don't fear the rate-hike cycle... Fund managers are stockpiling cash... Don't bail on today's market boom... You want to own stocks... Give yourself a shot at triple-digit upside...
It's a new year with a new boogeyman lurking in the shadows...
At least that's the way fund managers see it. And not just any fund managers... All together, these pros oversee $1.1 trillion in assets.
They're the "go to" guys on Wall Street... They get paid to grow other people's assets.
Now, we can't know exactly what they are doing for their clients. But we can get a sense of how they feel about the market... and which way they are leaning with their investments.
The Bank of America Global Fund Managers survey makes that possible...
Each month, it goes out to hundreds of managers from all around the world. Last month, 371 managers took part in the survey...
That included answering a long list of questions about the current market. Questions ranged from whether managers are bullish or bearish on stocks, to what threats lurk in the shadows...
That latter one is where our new "boogeyman" comes in... Each month we get an update on what the pros think is the biggest risk to the current market.
In the past it has been trade wars, the U.S. election, COVID-19, etc.
Today's new tail risk for the market is the "hawkish central bank rate hike"... Essentially, fund managers fear rising rates.
They see the Federal Reserve as a top threat to the market...
To see why some investors and fund managers fear a hawkish central bank, take a look at what we said in the January 6 Digest...
Now the central bank will pull out its blunt tools to try to fight inflation. The biggest tool in its box is raising interest rates...
The reasoning is that the Fed raising rates makes borrowing money throughout the economy more expensive.
That partly explains the recent tech-stock sell-off ‒ the idea being that tech companies rely on borrowed money more than other companies because they need to invest in growth... Whether this is true is another story and up for debate.
The broader truth that applies here though is that Wall Street, and our monetary system in general, doesn't like anyone messing with its addiction to debt.
Today, I (Chris Igou) am here to say that you shouldn't fear the upcoming rate-hike cycle...
Here's why...
First, spotting the next "black swan" isn't easy. Most events that take out a market aren't easy to spot.
In fact, most come with no warning at all... Think about the financial crisis back in 2008. Very few people knew that the housing market was about to be in shambles... Or look at COVID-19 in 2020.
Those are true black-swan events. Fund managers have been trying to spot the next big risk for the market for years... and they have failed to highlight the real risks for markets.
There are several examples of this over the past decade...
In 2012, it was the European Union ("EU") sovereign debt that folks thought would take out the market... Greece had recently defaulted on its debt. The country had to get bailout loans to stay afloat. And the worry was that a widespread default in Europe could cause markets to crash.
But that didn't happen. The bull market in U.S. stocks kept climbing. Take a look...
The S&P 500 Index soared 32%. Meanwhile, the EU sovereign debt issue never grew in scale. It wasn't the "tail risk" that would wipe out the market...
Another example of fund managers getting it wrong came in late 2013...
China's "hard landing" was the next boogeyman...
The idea was that China's growth was going to slow. As a nation, it was transforming from a high-growth emerging market to a slower-growth developed market.
The fear of how China's slowing growth could drag on global markets escalated. Fund managers made it their No. 1 "tail risk" for the markets in July 2013... And it stayed that way for most of 2014.
Yet, the S&P 500 didn't skip a beat. From July 2013 through the end of 2014, the S&P 500 was up 25%. Check it out...
Again, China's financial stress never materialized into a real issue for the U.S. market. The smart thing to do was to continue to own stocks...
We've seen fund managers raise red flags like this repeatedly. Other examples include the potential trade war between the U.S. and China, the 2020 U.S. election, and COVID-19...
The funny thing is that COVID-19 didn't become a tail risk until March 2020... That's when the S&P 500 bottomed and then took off higher.
Today, fund managers are highlighting the hawkish Fed as the next big tail risk. But that doesn't mean we should run for the hills.
They've been wrong plenty of times before. We could see stocks rally higher despite the fund managers' fears.
But the interesting thing to consider is this... Even if a hawkish Fed raises rates as anticipated, the data backs owning U.S. stocks when rates go higher.
In fact, you want to own U.S. stocks during a rate-hike cycle...
You see, timing is everything in the market... If you're right about your investment idea but wrong on the timing, you still lose money.
That's where the fund managers are making their mistake... Yes, rising rates always show up before the end of the bull market. But it's not the start of the cycle that should scare you.
In fact, the S&P 500 has soared several times during rate-hike cycles in the past. I wrote about this idea in a recent issue of the True Wealth Systems newsletter.
Here's a piece of what I shared back then...
The central bank raised rates in June 2004. But if you remember the 2000s boom, you know that was nowhere near the eventual peak. U.S. stocks rallied for years after that rate hike. Take a look...
There were 17 rate hikes from June 2004 through mid-2006. And the S&P 500 rallied the whole time. Investors could have locked in 46% gains before stocks peaked in October 2007.
You can see it's not the initial rate hike you have to worry about.
If the start of the 2004 rate-hike cycle scared you out of the market, you missed out on years of double-digit gains.
The same is true for our most recent rate-hike cycle. In 2016, a new phase of rate hikes was kicking off. But that didn't end the recent bull run either.
Here's what I wrote about this rally as well...
It made its first hike at the end of 2015. And it raised rates eight more times between the end of 2016 and the end of 2018. But that didn't slow the market down at all. Check it out...
U.S. stocks rallied almost 80% from the start of 2016 to their peak in early 2020. And we all know what caused the bust last year. It wasn't rising interest rates... It was COVID-19. So this is another case where stocks soared for years after the Fed's first rate hike.
If your hand was starting to hover over that "sell" button, I hope by now you are reconsidering... All eyes have been on the Fed's next move. But history shows it's not as scary as the headlines make it out to be.
You want to position yourself for another leg higher in stocks... not to panic, sell, and bunker down. But if you are still unsure, there's one more reason to be bullish on stocks today...
Fund managers are stockpiling cash...
Their cash pile jumped to 5.1% in December... That's up from 4.4% the month before. And it's the highest level since May 2020.
Managers aren't just pointing out their market fears... They're acting on them.
Now, you've likely heard me say this before: Bull markets don't end in fear... They end in all-out bullishness.
That means fund managers stockpiling cash is a good sign for the market. And we can see that once again by looking at previous examples...
We saw similar actions from managers in 2012, 2015 through 2017, early 2019, and 2020. Each of those times were great buying opportunities in the S&P 500...
This tells us that the recent cash stockpile is dry powder for these guys... And as the market continues to rally, they are going to start putting that cash to work.
Remember, having cash on the sidelines can protect you if the market goes south. But it can also weigh on your portfolio returns if the market goes higher, because returns on cash are next to nothing...
That means fund managers won't let this cash sit for long. They will start buying stocks again... and soon. That adds a tailwind for the market when they do...
In short, the top "tail risk" for today's market isn't something to fear...
You want to own stocks during a rate-hike cycle.
All of this points to more upside in the S&P 500 from here... Don't bail on today's market boom just yet. The right call based on the numbers is to stay bullish. Plenty of upside is likely left before the next market crash.
Of course, you can own a broad stock fund to profit from this opportunity. But if you want to take your investing to the next level, you need to check out our True Wealth newsletter…
My boss, Dr. Steve Sjuggerud, and colleague, Brett Eversole, are the masterminds behind True Wealth. Together, they have more than 30 years of experience in the markets. And their readers have benefited greatly as a result…
Since 2001, Steve and his True Wealth team have closed nine recommendations for 100% gains or more... And right now, the model portfolio includes two positions that are up at least 100% as I write.
That bottom line is clear...
You want to own stocks today. And if you want to give yourself a shot at triple-digit upside potential, you must try True Wealth. Learn more about a risk-free subscription right here.
When Cars Fly, These Three Stocks Could Soar
Do you know what was the best-performing auto manufacturer in 2021? You might guess Tesla (TSLA)... and you'd be wrong. Stansberry senior analyst Matt McCall reveals the company's name in this newest episode of Making Money With Matt McCall. It may just be the next stock you buy.
Plus, Matt also talks about the idea of flying cars, which a large European study says may be a reality in just two years. He breaks down the developments and shares three companies at the heart of the innovation...
Click here to watch or listen to this episode right now. And to catch all of Matt's shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.
New 52-week highs (as of 1/18/22): McCormick (MKC), Mosaic (MOS), Royal Dutch Shell (RDS-B), Suncor Energy (SU), United States Commodity Index Fund (USCI), and Viper Energy Partners (VNOM).
In today's mailbag, feedback on Tuesday's Digest about what's going on with the global economy today... What do you have to say? E-mail us at feedback@stansberryresearch.com.
"I always extremely enjoy Corey's articles for superior analytical insight into how international and local states of our economy are affecting the economic affairs of the everyday 9-to-5er, and those of us who have left the workforce and are trying to economically survive the intricacies of investing to keep us above high tide, so to speak.
"I believe Corey helps me plan my future investment path for whatever time I have left on this old earth. Thank you." – Paid-up subscriber Robert J.
Corey McLaughlin comment: Thank you, Robert. This note made my day...
Glad you find the information helpful. We're just trying to share what we would want to know if our roles were reversed. Enjoy your time on "this old earth."
"Hey Corey, Great article and review of the current scenario.
"Thank you for not mincing words about China's influence in all of this for the past two years. I hadn't even considered that the Winter Olympics is in Beijing, and how all of that may play out with regard to the Omicron issue.
"Perhaps this might be the 'why' of the February and March concerns that Greg has with the timing of a major correction. Time will tell." – Paid-up subscriber Paul D.
"Just good, plain, solid-gold information in today's update. I'm in full agreement that gold and other precious metals are the hedge to bet on as we start to pay the price for massive money printing.
"But I'm writing because of an oft-misused word appearing in the update. The phrase 'If Omicron is the last variant we have to deal with, then this entire discussion could be mute...' appears. Ack! A discussion, or a point that has no practical value is 'moot,' not mute. It's a common error, but this one always sets off my pedantic grammar alarm.
"Thanks for continuing to produce quality content." – Paid-up subscriber Lee D.
"Moot issue, moot point. Not mute.
"Look it up. You're driving English teachers crazy."
McLaughlin comment: I regret the error. Turns out we have a quite a few English teachers in the audience who wrote in... so thanks. We updated this on our website.
I actually don't need to look up the difference between moot and mute, but I wrote the wrong word and can see why you might think I don't know the difference.
Can we call it an "unconscious error," or a "phonetic typo," – probably related to me muting the television more often these days – and consider this a moot conversation?
Good investing,
Chris Igou
Jacksonville, Florida
January 19, 2022