Back in 1973, the Fed made a huge mistake. One that led to a decade-long inflationary spiral.
And right now, it could be gearing up to make that same mistake again.
Today, I’ll tell you what that was and the surprising reason we’d want to see something most investors are dreading.
The reason is simple…
At Intelligent Income Daily, our goal is to find the safest and most reliable income opportunities. These are the ones that have the highest statistical likelihood of boosting your bottom line through all market conditions.
So when it comes to interest rate hikes, we can take the opposite stance than most investors… and still sleep well at night knowing our investments will beat the markets in the long run.
Sticking to Its Guns
In 1973, the U.S. economy was in a recession. Arthur Burns, then chairman of the Federal Reserve, opted not to hike interest rates.
Even though inflation wasn’t beaten, he started cutting rates to keep unemployment from rising and to boost the economy overall.
But what we got was the other end of the extreme: A decade-long inflationary spiral that took inflation to a peak of 15%. The only way to get out of that situation was to raise rates substantially in the following years – up to 20% by 1980.
The results were disastrous for the American economy. This caused two back-to-back severe recessions. The Dow Jones Industrial Average ended up going nowhere for 16 years. And unemployment hit 11% in 1981.
Today, we’re getting ready to face the same situation Burns was looking at in 1973.
For 14 years, investors have gotten used to the Fed supporting stock market growth. Even up until this year, there was a lot of faith in a “Fed pivot,” where it would hint at rate hikes and then ultimately demur.
But this year, the Fed hasn’t pivoted. In fact, it raised rates by 75 basis points three times in a row.
And many investors are concerned. It’s part of the reason the market is down more than 20% in 2022. And stocks are now potentially on track for their fifth straight week of declines.
According to some stock market experts, more pain might be coming. Here are some who expect stocks to fall another 15% to 22% from here:
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Carl Icahn (as I told you yesterday)
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Ray Dalio (founder of the world’s largest hedge fund)
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Goldman Sachs
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Morgan Stanley
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Bank of America
But even if the markets do tumble as interest rates stay high – or increase – this doesn’t have to be bad news for us. Here’s why…
Be Careful What You Wish For
You see, higher interest rates right now could hurt in the short-term… but be good for the economy in the longer run.
I asked my analyst Adam Galas, who’s constantly doing in-depth research on market trends, to take a closer look at the situation. Here’s what he had to say…
Societe Generale and UBS have two stagflation hell scenarios involving the Fed pivoting too soon. Those scenarios include a lost decade for stocks, several long and severe recessions, double-digit unemployment, and a 48% to 53% stock market crash.
Do you think stocks falling another 15% to 22% from here sounds bad? Well, how does stocks having to fall another 38% from here before bottoming in two or three years strike you?
If the Fed can beat inflation now (and the bond market is confident it will), then we likely have a few more months of pain, followed by a decade of strong gains.
If the Fed blinks now and gives the market what it wants (a pivot), we could be facing a decade of stagflation hell that proves the warning "be careful what you wish for."
Right now, the Fed is indicating interest rates as high as 4.5% or 4.75% (or even higher). And it might not start cutting rates until October 2024.
Which is why the experts are predicting stocks will fall another 15% to 22% from here. That sounds awful to many investors.
But the good news is that if the Fed kills inflation, the bottom is likely much closer. And what comes after that?
Here’s Adam again…
Historically, stocks deliver about 3.8X returns in the 10 years following bear markets. That’s about 14.4% annual returns.
What if we get that 15% to 22% further decline – the kind that comes from historically average bear market bottoms? Then that rises to 15.2% to 16.9% annual returns or 4.2X to 5X returns over a decade.
Individual blue-chips, like the ones we target at Wide Moat Research, can deliver even more. According to my calculations spanning dozens of blue-chip stock portfolios, we can expect about 8X to 20X returns over 10 years following a healthy bear market bottom.
In other words, smart investors shouldn’t be praying for the Fed to pivot and start cutting rates as soon as possible.
They should be patient, not worry about interest rates, and trust the world’s best blue-chip stocks to get them through this bear market… just as they’ve done in every bear market of the last few decades.
And starting next week, I have an exciting new project launching that will help you target exactly those kinds of stocks. So keep an eye on your inbox…
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily
P.S. Are you worried about interest rates rising? What kind of strategies are you looking at to protect your portfolio in the coming years if rates stay high? We want to hear from you. Let us know your thoughts right here.