Last week, John Del Vecchio, our resident forensic accountant and seeker of hidden profits, sent an email to his Earnings Insider Alert subscribers. He shared an interesting perspective with them, so I’m sharing it with you now too…
While the market has bounced back strongly from its recent scare, it’s my opinion that we’ve entered a new phase of the stock market cycle.
The short volatility trade worked until it didn’t. Now that it’s imploded, it’s reminded people that volatility does in fact exist in the markets and that sometimes stock prices do in fact go down.
Investor sentiment has come down some, but not enough to call any sort of bottom. In addition, valuations remain way too rich, especially in a period of peak profit margins.
Expect more volatility going forward. Scare after scare will eventually lead to a bear market. Then we’ll finally have a low-risk buying opportunity that could set itself up for strong returns for years to come.
Rodney also believes we’re witnessing a sea change.
Six months ago, he recorded an Ahead of the Curve webinar – something only our lifetime subscribers have access to – on the Federal Reserve. He detailed how the central bank was starting to trim its $4.5 trillion balance sheet – and the impact that could have on the economy and markets in the months and years ahead.
Last week, with markets experiencing volatility not seen in years, bond yields rising, and inflation jitters bubbling, he recorded a new Ahead of the Curve webinar in which he talked about this in more detail.
The Fed has continued to take money off its books at an increasing rate, and by the end of the year, the central bank will be slashing its balance sheet by $50 billion every month. That’s money – created in the years after the financial crisis by the Fed’s monstrous bond buying policies – that will disappear from the marketplace. And that’s a big deal!
By trimming its balance sheet, the Fed is pulling out of the bond buying business, and that may influence other buyers to do the same. All the while, the central bank won’t blink at a 10% or 20% drop in equities – since it’s more concerned with normalizing interest rates at this point, which is one of its big three mandates.
For this, and several other reasons, including growing fears on increasing interest rates and rising inflation, we’re on the threshold of our Fixed Income Trade of the Decade. 10-Year Treasury bonds are toying with the 3% yield level. The 30-year Treasury bond yield topped 3.2%. So, on Monday, Charles Sizemore, our Boom & Bust portfolio manager, instructed subscribers to make our first play on this trend.
Follow Me on Twitter @harrydentjr