Chief Investment Strategist, The Freeport Society
Just a few weeks ago, I was that bold voice in the wilderness predicting that – contrary to the belief of virtually all of Wall Street, the mainstream media, and the Federal Reserve itself – the Fed wouldn’t cut rates until after the November election. (You can see my comments on this in the Election Shock Summit here, by the way.)
Now I’m starting to wonder if I was bold enough…
An increasing number of folks now believe that the Fed will raise rates instead of cut them. And it’s not the fringe shock jocks hoping to get on TV who are saying this.
As I wrote in the Freeport Navigator earlier this month, Federal Reserve Board Governor Michelle Bowman has been openly floating the idea of additional rate hikes for weeks, as have New York Fed President John Williams and former U.S. Treasury Secretary Lawrence Summers.
Now it seems the options market is coming to grips with the idea. As the Financial Times reported this week,
Traders have built up bets that the Federal Reserve could raise interest rates again, a once-unthinkable prospect that highlights a shift in market expectations after stronger than expected U.S. economic data and hawkish comments from policymakers.
Options markets now suggest a roughly one in five chance of a U.S. rate increase within the next 12 months, up sharply from the start of the year, according to analysts.
Again, these analysts whom the FT speaks of aren’t obscure cranks. The article quotes Richard Clarida, an economic advisor at leading global bond firm Pimco, as saying, “At some point, if the data continues to disappoint, then I think the Fed will have to start re-engaging on hikes.”
Of course, the options market isn’t omniscient. It’s perfectly capable of miscalculating the odds, as all are markets.
Anyone who says the options market, stock market, or any other capital market is rational should be forced to wear a straitjacket and live in a padded cell for their own protection.
And let’s not forget that this same options market was, until very recently, pricing in a virtually 100% probability that rates would be sharply lower by year end.
Still… the change in sentiment is telling. And if rate hikes are now part of the conversation, then at the very least we should assume that rate cuts aren’t going to be happening any time soon… and probably not this year.
Suddenly my bold call of no rate hikes until after the election seems almost quaint!
But there’s a lot more going on too…
We live in an Age of Chaos, and this presidential election year promises to be the most chaotic one of our lifetimes… possibly in history. It could also very well have significant fallout.
Let’s take a look at taxes, for example.
Most of Donald Trump’s presidency was sound and fury signifying nothing. But his one landmark piece of legislation – the Tax Cuts and Jobs Act of 2017 – had an outsized impact on the stock market. It raised the standard deduction and lowered marginal tax rates, particularly on higher-income earners. It also lowered the corporate tax rate from 39% to 21%, which boosted corporate earnings and made a lot more cash available for dividends and buybacks.
The personal tax cuts are scheduled to expire in 2025, and President Joe Biden wants to make major changes to the corporate tax regime, raising the corporate income tax back to 28%… as well as raising the tax on dividends and capital gains for high-income taxpayers to a staggering 44.6%.
So, here’s the deal…
If Biden wins, taxes will almost certainly go higher.
If Trump wins, taxes could still go higher, but not by quite as much. With his tax cuts expiring in December 2025, unless the Republicans have control of both houses of Congress and vote to extend them, tax rates automatically revert to pre-Tax Cuts and Job Act levels.
But that’s not all.
If Freeport Society friend Louis Navellier is right, Trump and Biden could both be pushed aside as this “shadow candidate” steps up to the plate. Then we can only guess how much higher rates will go.
This is why we need to be tactical.
An environment in which inflation and interest rates are high, taxes are rising, and overall stability is at risk is not a good one for buying and holding just any old stocks.
You need to be investing in stocks I call “the Rich Man’s Super Currency.”
And you need to be agile… ready to grab the almost infinite number of shorter-term opportunities out there.
Doing this alone is possible… if you’re prepared to put in countless hours of research. Or, you can let our MoneyFlow Indicator be your guide. I explain how it works, and why it’s more important now than ever, in this video.
Whatever you do, don’t be complacent.
To life, liberty, and the pursuit of wealth.