Due to trade uncertainties, the market is pricing in an interest rate cut at the end of the month. During the July 30-31st Fed meeting, officials are 100% expected to cut interest rates by 25 basis points. Furthermore, this comes with the possibilities of future rate cuts in late 2019 and early 2020. This means borrowing costs will decline and business investment could increase. Fed Chair Powell understands the risks associated with Brexit, high debt levels, and trade wars. With mounting economic risks, it’s no surprise the Fed would be considering a rate cut. This does, however, give investors no alternative but to invest in stocks.
The Dow recently crossed the 27,000 mark and seems to keep churning higher. This is nearly 6000 points off the lows seen last December. Surprisingly, the economy is worse off than when the market was tanking. Reason being, investors price in future events. They felt out a possible slowing economy at the end of 2018 and sold stocks in large numbers. Now, with parts of the economy actually showing softness, investors are assuming the economy will improve. They believe interest rates will decline and that trade disputes will be resolved in a matter of months. More importantly, with interest rates still low, investors have no alternative but to invest in stocks.
Inflation is low but still exists. Hoarding cash under one’s mattress 100% results in an annual loss of 2% due to inflation. With low interest rates, investors will fail to earn meaningful returns with bonds or CDs. This sort of forces individuals into real estate and the stock market. There is simply nowhere else for us to put our money! This is precisely why the market is doing so well despite softening business investment and global economic uncertainty. Hence, to generate wealth, it’s necessary for investors to buy in even at these elevated levels. After all, we have no idea when the next real downturn will take place.
It appears that there are some opportunities in the industrial sector. The market overall is at all time highs but there are pockets of value. 3M is down significantly due to a slowdown in China and offers a generous 3.26% starting yield. Another blogger I follow recommended looking at Leggett and Platt, a century old company that produces furniture components. The prospects of low interest rates and a weaker economy have elevated consumer stocks, REITs, and utilities. Therefore, as much as I don’t like the softness in the industrial sector, it might be the way to go in mid-2019. Buying on weakness often leads to substantial gains when investing in quality businesses. So yes, I will be buying at Dow 27,000 as I see no alternative!
DISCLAIMER: I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.