This Will Kill the Bull Market... But Not When You Think
Editor's note: Investors are worried for the wrong reasons...
As stocks keep moving higher, many people are wondering what will finally kill the decade-plus bull market. And recent news that the Federal Reserve plans to raise interest rates this year has investors panicking. But our colleague and Stansberry Research senior partner Steve Sjuggerud believes they're focused on the wrong thing...
According to Steve, rate hikes won't kill the bull market. It's what comes next that will send stocks plummeting.
In today's Masters Series – adapted from the January issue of Steve's True Wealth Systems advisory – he explains why stocks could climb double digits from here... details the "warning sign" that will flash before the next bear market... and reviews how this situation has played out in the past...
This Will Kill the Bull Market... But Not When You Think
8,100.
That's the level the S&P 500 could hit before the next bear market.
It sounds crazy, I know. We're in the late innings of this bull market... And stocks are already up a lot since it started. They've doubled over the past three years alone.
I understand those concerns. But that doesn't mean the party's over... Bull markets do not die of old age. They die because the fundamentals change. And that hasn't happened yet.
My friend, there's plenty of upside left before the clock hits zero.
For the S&P 500 to hit 8,100, it would need to rally another 80% from here. I know it's a bold claim... And it might not play out exactly like I'm describing today. But not only is it possible – it has happened before (as I'll get to shortly).
Either way, given today's setup, I believe this bull market has plenty of room to run. Let me explain...
The big reason folks are getting cautious is the Federal Reserve.
Investors are eyeing the Fed's next move like football fans watching their kicker attempt a last-minute field goal for the win. The pressure is on... And everyone is worried about what will happen next.
The Fed now expects to hike interest rates several times in 2022. The general consensus is that a rate hike is bad for the market. And that's true... over time. But the idea almost everyone believes – that the good times end as soon as interest rates tick higher – is simply not the case... In fact, as my colleague Chris Igou wrote in Wednesday's Digest, the opposite can happen.
Here's what Chris wrote recently...
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...
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.
The start of previous rate-hike frenzies led to gains in the S&P 500... not crashes. Chris also noted that significant upside followed those rate hikes. The Fed hiked rates 17 times from June 2004 to mid-2006. Yet the S&P 500 soared over that period... rallying 46% before its peak in 2007.
Stocks climbed even more from 2016 to 2020. The Fed hiked rates for years... But the S&P 500 still rallied nearly 80%.
Here's the thing... Jerome Powell took over as Fed chairman in the middle of that last rate-hike cycle. We got to see him make the play calls in real time. And he's still chairman today.
Sure, we can't see the Fed's exact playbook. But we know it will likely be similar to what we saw back then. Expectations are that this rate cycle will last two to three years... similar to last time around.
To lay it all out... that means we could see three rate hikes in 2022, three in 2023, and potentially one or two in 2024.
Many folks see that and expect the worst. Higher rates and less Fed support must be bad for stocks. That's the logic – but we know it's dead wrong.
Rates hikes don't kill bull markets. Not right away, at least.
With Jerome Powell using a similar playbook to the last cycle, stocks could soar from today's levels while the rate hikes are underway. That makes an 80% rally in the S&P 500 possible from here.
Now, that doesn't mean stocks will rally forever. I'm also not expecting the market to move higher in a straight line... That's not how markets work.
We will see pullbacks in the S&P 500 along the way. There will be volatility. But if you expect a major bust in the coming weeks, history disagrees.
The truth is, investors today are focusing on the wrong threat entirely. And they'll likely miss the real warning sign when it arrives...
Folks, it's not the initial hike that will end today's bull run. It's when the Fed is done hiking rates.
That will be the fat warning sign that it's time to sell stocks.
Almost everyone has this wrong. But if you study history, the pattern becomes obvious. A plateau in rates tends to arrive before a major crash.
This makes sense when you think about it. The Fed usually hikes rates to cool down an overheated economy. But it takes time for that cooldown to actually happen... and for markets to react.
When the Fed stops hiking rates, it's usually because it thinks it has done enough... or even too much. The market tends to realize that shortly after rates stop rising. And then stocks crash.
Let's look at previous cycles to hammer this home... starting with the late 1990s.
The dot-com boom was raging. The Fed started to hike rates in mid-1999. After a year, the central bank decided to end its rate-hike program, and rates leveled off between May and November 2000.
The S&P 500 retested its March 2000 high in September. Then, it headed into a bear market. It fell 46% from early September 2000 through its October 2002 bottom. Check it out...
That was a brutal bear market with two full years of falling prices. The S&P 500 was nearly cut in half over that period. Ouch.
But again, it wasn't the initial rate hike that spelled doom. It was when the Fed stopped hiking rates that investors got their warning sign. If you got out when the Fed stopped hiking rates in September, you could have avoided nearly all of this downturn.
As Chris explained on Wednesday, we saw a similar move before the S&P 500 peaked in 2007. The Federal Reserve was hiking rates from mid-2004 to mid-2006. Then, rates leveled off in the second half of that year.
This time, the S&P 500 had about a year left before entering a downward spiral. The index peaked on October 9, 2007, and fell 51% by late November 2008. Take a look...
It was the worst bear market in the S&P 500 since the Great Depression. And it was the hardest period for our country's financial system that most of us have seen in our lifetimes.
While the Fed ended its rate hike well before the market peaked, it was a warning sign for investors. The bull run was coming to an end.
Let's look at our most recent example, too...
The Fed went on a rate-hiking run from 2016 through the end of 2018. And it decided to keep rates flat for a few months starting in 2019.
Now, COVID-19 caused the next big crash. But the S&P 500 still fell 34% in a month, starting in February 2020...
This was another record-setting bear market in the S&P 500. While it's not the best example, it still shows that when interest rates level out after a series of rate hikes, it's a warning for investors...
It sets up a tough market environment. Once rates have gone up a lot, nobody wants to take out loans. Liquidity is tight. And that means the odds of a crash are higher than normal.
The current bull market could end when the Fed stops hiking rates. But we're nowhere near that happening today.
The Fed's first rate hike is certain to happen this year. And starting then, the central bank is planning a series of hikes stretching over the next few years.
In short, we're a long way off from a plateau in rates. We've got years of hikes ahead before that happens. That means we still have plenty of time to profit from today's boom.
Good investing,
Steve Sjuggerud
Editor's note: Despite what many investors think, Steve says the bull market has plenty of room to run. And that means there's still time to make this year the "turning point" for your investments...
On Thursday, January 27, at 8 p.m. Eastern time, Steve will join fellow Stansberry Research senior partner Dr. David "Doc" Eifrig and Director of Research Matt Weinschenk to discuss their unscripted thoughts on the market... and what they expect to happen in the months ahead. Plus, they'll reveal the names and ticker symbols of their No. 1 stock picks for 2022.
If you're worried you missed out on the incredible recovery in stocks since the 2020 crash – or if you're simply wondering where the market is headed next – this is one event you don't want to miss. Reserve your spot right here.