Expect Interest Rates to Rise This Year

Recently a Federal Reserve official indicated that the US central bank could raise interest rates by early March. This is in response to “alarmingly high inflation rates,” according to a recent article in the Financial Times.

CPI inflation recently rose to an annual rate of 6.8% in the last 12 months ending Nov., according to the Bureau of Labor Statistics.

This was up from 6.2% for the 12 months ending October. In other words, inflation is accelerating.

On Jan. 10, the US Dept. of Labor will release the figures for all of 2021. Investors could end up with a surprise if the inflation rate remains elevated.

Where This Leaves Investors

If interest rates are jacked up by the Fed in early March, the stock market will likely react negatively to this event.

At first, after the Fed raises rates, there will be a knee-jerk downward reaction. After that, the market will recuperate. That process may take a week or two weeks.

However, based on past experience, if the Fed persists in raising rates several times, the market will become greatly concerned. At that point, there is a substantial chance of a major market break.

So I can envision a situation where the Fed raises rates in March but by May or June, it has done so again twice or three times. By then, the market will be in a sour mood.

You should expect a 50% or greater downturn as a result. This is highly likely. Whether that means the market will stay down 50% is another issue.

For example, it could rise 15% to 20% in a normal rise during the first quarter. Therefore, a 50% retrenchment would end up lowering it by 30% to 35% on a year-to-date basis.

Investors should be prepared for this.

How To Prepare For a Major Break

There are really only two fully ready ways to prepare for a major market break.

Start stockpiling cash to put to work when the break happens.

Short overvalued stocks, but market index put options and reduce your overall market exposure.

Doing these two things will allow you to take advantage of a major market correction happens.

By the way, when the market falls, it doesn’t usually last too long. You should wait for prognosticators to say “Sell, sell, sell,” before starting to buy.

That is the best time to begin accumulating positions in well-known, large market-cap stocks and especially dividend-paying equities.

The key to this exercise is to have extra firepower. Get rid of all margin positions you may have during Q1. Start selling into the market if it goes up during Q1. Accumulate a large cash position, higher than normal, especially if you see the Fed raising rates more than two times in a row.

Bottom Line

The only for sure way to make money during a year in which a major market break occurs is to be ready for it.

This means you need to have the internal fortitude to take advantage of a situation where everyone is selling their positions.

In fact, you might not even make money at first. Your first position buying into a selling market could actually lose money. You have to have enough cash and margin to be able to lower your costs, even after everyone is selling.

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This is not financial advice and you should not rely on my analysis to buy or sell any stock, security, or crypto, as I am not undertaking to induce you to buy or sell securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

This represents my analysis of the market and stocks in general and it is not meant to provide you with specific advice in your own situation. I do not own any particular stock or related securities or options but I may buy them in the near future. Your own situation could be different and this is not a recommendation to purchase the stock.

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Mark Hake writes articles on InvestorPlace.com, Medium.com, and Newsbreak.com on stocks and cryptos and also runs the Total Yield Value Guide which you can review here.

He is a top-ranked financial writer, ranked 5 stars by TipRanks.com in the top 0.30% of all financial bloggers with an average return of over 20.0% on over 500 stock and crypto articles in the past year.