The One Thing I’m Watching Now – The FOMC and How to Protect Your Investments from a Worst-Case Scenario
As broad as the markets are, as vast as the economy is, as much data as there is to key in on out there, there’s one thing I’m watching now that matters more than everything else.
It’s what the Federal Reserve’s going to do, or not do, to interest rates.
Because based on what Fed members on the Federal Open Market Committee (FOMC) decided in their two-day meeting, which gets released as their official “statement” today at 2:00 pm, will either calm markets or could knock them off their recent all-time highs, down maybe 10%-15%, or more.
How to Survive the Next Market Curveball
First, make sure you have stop-loss orders down on your positions. Especially your “growth” stocks, the big tech names who’ve been battered as rates have been rising but have rallied robustly lately.
Those names saw a lot of hot money rushing in over the past eight days, which isn’t going to stick around if things turn cold.
And investors with huge long-term profits in mega-cap tech stocks, who didn’t get out when the 10-year Treasury yield went from 1% to 1.61%, aren’t going to let the recent rally go to waste. They’ll sell into it.
Why? Because if rates are on a cyclical uptrend, the whole premise for investing in tech stocks comes under real-world valuation methodology fire.
The rest of the market could catch cold if big tech sneezes.
So-called cyclical stocks could see quick and energetic profit-taking on the heels of their tremendous run higher, which is where investors fleeing tech stocks mostly went. That “rotation” trade could turn into a rout if the Fed’s messaging is anything other than comforting.
On the other hand, if the Fed’s analysis of the economy is that it remains tentative, which analysts looking for 7%-10% GDP growth in the first quarter obviously would take issue with, and that they’re going to keep rates lower for longer until they see what the economy looks like after pent-up demand subsides in the second half, or that they want to see inflation average 2% for a few years, meaning they’d let it range up to more than 4% and be comfortable keeping rates low, then buy everything.
Especially those big-name tech stocks and cyclicals.
Although the Fed’s not as cryptic as it used to be under Alan Greenspan, the originator of the “Fed put,” it’s still not easy to figure out what they’re saying, even if it sounds like plain English.
For example, Twist and Shout isn’t a dance. If the Fed’s statement or Chairman Jerome Powell in his press conference references “twist,” especially if Powell raises his voice when he talks about it, that’s a good sign.
Twist refers to a Fed policy to keep rates down on the longer end of the curve, meaning the 10-year Treasury yield, by buying longer maturity bonds instead of shorter-maturity bills and notes.
Besides buying $40 billion a month in mortgage-backed securities, the Fed’s been buying $80 billion a month of Treasury bonds, mostly short maturities to keep short rates down. To stem a rising yield on the 10-year, the Fed would twist its buying from short to long maturities.
If they’re very vocal about it, should the 10-year rise faster than they’re comfortable with, that will be like shouting to investors, BUY, BUY, BUY.
Supplemental leverage ratio, or SLR, is another phrase to listen for or even better, read in the Fed’s statement.
SLR is a calculation big banks face when they add up their assets, liabilities, and the leverage they’re incorporating. Last year as markets were crashing and the Fed wanted to soak fires with liquidity, they granted banks an exemption to not have to count additional Treasuries they could buy in their supplemental leverage ratios. Higher SLRs require banks to reserve more.
Since Treasury purchases wouldn’t count against that ratio under the exemption, banks loaded up, big-time, on Treasury bonds.
That exemption ends on March 31, 2021. A couple of weeks from today. In-the-know investors, which includes you now, realize if the fed doesn’t extend the SLR exemption, and banks unload their “excess” Treasuries, rates could spike.
An extension of the exemption, or some other accommodation, would be a positive for markets. If there’s no mention of an extension, or worse, if Mr. Powell says they’re ending it, watch out.
Besides those key terms, investors need to be mindful of the tone of the statement and the Chairman’s tone as he answers questions.
Depending on what the Fed does and says on Wednesday afternoon, basketball’s March Madness could look calm by comparison.
During all that insanity, our current administration will still be a war path to spend trillions on energy and gun control, while the rest of the country suffers under the biggest tax hike since 1993.
And those trillions aren’t coming from nowhere, it’s coming right out of your pockets. Paychecks, savings… nothing is safe.
But I have plan, the 2021 Financial Freedom Action Plan, which has the potential to get you the profits you need to stay the course.
You’ve been warned.