Masters Series: U.S. Stocks Can Soar Even as Interest Rates Rise

Editor's note: Despite the market's tumble at the start of 2016, Steve Sjuggerud believes stocks could be headed much higher.

In today's edition of our weekend Masters Series – excerpted from Steve's brand-new book – Steve explains why the Federal Reserve's recent decision to raise interest rates could be a boon for U.S. stocks in the near term...

U.S. Stocks Can Soar Even as Interest Rates Rise
By Steve Sjuggerud, editor, True Wealth

The six years from 2009 to 2015 were one of the greatest periods in history to be an investor. Heck, just about every major asset class went in one direction... up.

But the largest beneficiary of low rates, by far, has been the U.S. stock market. Since bottoming in early 2009, the S&P 500 increased more than 200% through mid-2015.

When you include dividends, the market increased every year from 2009 to 2014. And astoundingly, five of those six years generated 10%-plus gains...

But now, as interest-rate increases approach, many investors are fearful that a tighter Federal Reserve could spell an end to the rally we've seen over the past six years.

While I have a lot to share on the subject, I'll give you the conclusion up front...

Rising rates do NOT mean the end of the bull market in U.S. stocks.

Please, don't take my word for it. Let's take a look at the numbers. It might surprise you, but history shows stocks could go much higher... even after interest rates rise.

You see, I found a simple way to determine the Fed's "modes." These modes show us the goal of the Fed at a particular time.

Simply put, the Federal Reserve is always doing one of two things. It's either easing or tightening.

No matter what's going on in the economy, the Fed is always in one of these two modes.

In easing mode, the Fed lowers rates and prints money. Its goal is to boost the economy... to give it a bump when times are tough.

Tightening mode, on the other hand, occurs when the Fed raises rates... when it wants to cool down an overheating economy and slow inflation.

From 1950 to 2015, the Fed spent roughly half the time in each of these modes. That, in itself, isn't useful. But what happens during these modes (and when these modes begin and end) is incredibly valuable.

As you can see in the next table, Fed easing leads to higher stock prices... and Fed tightening leads to lower stock prices.

From 1950 to 2015, the average one-year return on U.S. stocks was 8.5%. But owning stocks during periods of easing increases that by nearly 40% to an average one-year gain of 13.3%.

Owning stocks during tightening, on the other hand, dramatically underperforms. Your average one-year return falls by more than 50% to just 3.7%. We see a similar relationship in all time frames.

In short, you don't want to "fight the Fed." And you're much better off owning stocks during periods of easing than during periods of tightening.

When rates rise, it means the Fed is moving to tightening mode. So you might think that's the time to get out of U.S. stocks. But the numbers above don't tell the whole story...

Looking at all periods of easing and tightening isn't good enough. We want to know, specifically, what happens when easing ends and tightening begins. So that's what I tested.

I looked at every occasion when the Fed switched from easing to tightening. It turns out that buying when the switch happened (like when rates rise) led to increased stock returns over the short term.

The next table shows the details...

From 1950 to 2015, the average one-year gain on stocks was 8.5%. But if you'd bought when a new period of tightening began, you'd have beat that return... making 9.2%, on average. (And incredibly, we'd have made money one year later 83% of the time!)

This idea works even better on short periods, as the table shows. In the first six months after tightening begins, stocks increase 8.8% on average... more than double their average six-month return.

And over three-month periods, stocks triple their average return if you buy as tightening begins...

Similarly, buying stocks as easing begins underperforms the all-periods gain on all of these time frames. That goes against what most folks believe. But it's true.

Most folks think stocks should do well when the Fed begins easing mode and poorly when the Fed begins tightening. But it's simply not the case.

History shows that stocks should have at least one year of continued gains AFTER the Fed begins tightening.

So Fed tightening doesn't mean stocks are doomed right then and there. It means we have a safe opportunity to continue owning U.S. stocks for another year, based on history.

Good investing,

Steve Sjuggerud

Editor's note: Based on history, the Federal Reserve's extreme actions could push stocks much higher in the short term. But the Fed also severely damaged the health of the U.S. dollar... and Steve believes we could be headed for a full-blown currency crisis.

That's why he published a brand-new book, titled Currency Crisis: How to Protect and Grow Your Wealth When the Government Destroys Our Money. In it, he shares several ways you can profit as the dollar collapses, including how to put currencies to work for your benefit... a fantastic opportunity in gold coins... how to hedge against a weakening dollar and make 500%... and much, much more. Get your copy right here.