I follow the markets. And I always look for the best income-producing ideas that will boost your bottom line, regardless of economic conditions.
So while I’m no great defender of Federal Reserve Chair Jerome Powell… It’s my job to anticipate what markets will do after big Fed announcements about interest rates – and our economic outlook.
That’s why Powell’s statements at this year’s Jackson Hole Economic Summit came as no shock to me or my team here at Intelligent Income Daily.
And the market’s reaction – plunging 4% last Friday – wasn’t surprising, either.
Today, I’ll dive into exactly what happened with the latest Fed-induced twists and turns… what they signal for the future… and how they affect the kind of investments we target.
But to do so, I want to introduce you to one of the world-class analysts on my team, Adam Galas.
Adam eats, breathes, and sleeps safe, back-tested income strategies. He has over 23 years of stock market experience, which he uses to help guide readers to long-lasting wealth.
He’ll help me break down what’s going on in today’s interest-rate environment – and what it means for your portfolio in the coming years.
Interest Rates and Inflation
For starters, here’s a quick primer on why the Fed changes interest rates…
Generally speaking, lower interest rates make it cheaper to borrow money and promote fast economic growth. And higher interest rates are meant to reduce inflation.
It can take a few months for these changes to actually impact the economy. But any time the Fed announces a hike or cut, the stock and bond markets react immediately.
Now let’s hear from Adam on the three takeaways investors could take from Powell’s latest speech:
Before Jackson Hole, some analysts predicted that stocks could stage a recovery. They even thought the markets could hit new record highs by the end of the year.
Why? Because they assumed the Fed was going to pivot on its tough-love, higher interest rates position.
But Powell was like a fire-breathing dragon last week that torched Wall Street’s delusional dream. His speech had three key takeaways for investors:
The Fed considers low inflation the cornerstone of a healthy economy and sustainable job market.
It’s 100% committed to returning inflation to 2% and is willing to send unemployment higher to do it.
And it’s prepared to keep interest rates much higher for as long as it takes before cutting them to ensure inflation expectations don’t rise.
This was a tough pill to swallow. But according to the Fed and its representatives, we are a long way from beating inflation. And it’s prepared to stifle growth until we get there.
That could mean 18-24 months of interest rates at 3.75%. Right now, they’re around 2.25-2.5%.
But here’s the thing… Just because we’ll see higher rates doesn’t mean you shouldn’t own stocks. You should just be more selective about which ones you own.
Now Is the Time to Be Picky
What does a world of 3.75% interest rates for up to two years look like? Well, it’s likely to be a lot less kind to speculative assets.
In June, the Fed announced its largest single rate hike in nearly three decades. Around the same time, stocks were plunging by as much as 3% per day. Meanwhile, speculative companies like Spotify and Zoom, some of the darlings of the pandemic, were falling as much as 10% daily.
But what about high-class dividend stocks like what we specialize in? Aren’t they hurt by high-interest rates?
They can be in the short-term. But there’s something that might surprise you. Here’s Adam again:
According to JPMorgan, since 1980, stocks have tended to do well even if interest rates are rising.
Even since 2009 (the low-rate era), if 10-year Treasury yields are under 3.6%, stocks tend to go up steadily, even if rates are rising.
Since 1988, we’ve had 33 different inflation and interest rate regimes, and stocks have delivered annual returns of 11%-15% throughout all of them.
That doesn’t mean that a sudden rate spike can’t cause stocks to fall. It’s happened dozens of times over the last 34 years, including in 2022, 2013, and 2018. But these tend to be relatively short corrections, not multi-year bear markets.
That tells me blue-chip companies are worth owning, regardless of inflation and rates.
What’s more, high interest rates are actually an ally for income investors like us. That’s because they tend to happen only in strong economies where corporate sales, earnings, and cash flows are growing.
That growth drives dividends and stock prices higher, a relationship that’s been true for the last 206 years, according to global investment giant BlackRock. As long as the fundamentals of the companies we target are sound, they’ll be able to survive – and reward us over the long term.
So if you’re worried about living in a high interest-rate world in the coming years, there are still ways to preserve and compound your wealth.
Smart long-term investors buying the world’s best REITs and high-quality dividend growth names have little to fear from Jerome Powell, the Fed, or high interest rates in the years to come.
That’s why we’ll stick with healthy dividend-paying companies that offer products and services the public wants year in and year out. And we’ll continue to bring you our research on how to spot them every day.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily
P.S. Are you worried about your investments in a high-interest-rate environment? Or are they SWAN stocks like the ones we write about? We’d love to hear from you. Let us know right here.