Now you see why I have been against a rate hike. Stocks in lots of industries go down, even as a few go higher.
But being against a rate hike and accepting its inevitability are two very different things. We need to understand the difference.
First, I get that we can't have ultra-low rates forever, even if they are good for the stock market during the duration. Eventually, too much money chases too few goods and we will get inflation.
There are reasons why we have never had ultra-low rates forever, and they have to do with the inevitable debasement our money and the possibility of a dramatic decline in purchasing power. The mandates of the Fed are to promote an environment where we can have a flourishing economy but to do so without igniting inflation, which can destroy the life savings of people and create a situation where most people cannot keep up with the prices of goods.
I certainly am not in favor of that occurring. I had been concerned that the first mandate, the one where more jobs can be created, ones that pay a decent amount, might be upended by higher rates. Right now, though, after that barnburner of a jobs number last Friday, it's difficult to fret over job losses.
I also had been worried about the precarious nature of our overseas trading partners, particularly China, with its nonstop bear market. But that ended, and China is in bull market mode.
To not worry about Europe seemed ignorant, but the data out of Europe have been strong and getting stronger. Now we know that a lot of the strength comes from the weaker euro, and the companies that sell in euros have been taking share from American companies where they are competitive -- a decidedly bad blessing.
But to worry about systemic risk from Europe or China from a rate hike? That just seems wrong to me.
There will definitely be negative reverberations in emerging markets that have to borrow to make good their obligations. That's a given. It always happens. It's another reason why I am not crazy about a rate hike. However, the ramifications are awful and you will hear about them every day for weeks.
Most important, I believe the dollar will soar, making the exports of our companies decline dramatically versus our competitors. Here we will have big layoffs as our manufacturers just can't keep up, and we have really open borders versus every other country.
So why with all of this gloom do I believe a rate hike has to occur? Because neither the stock market nor earnings matters when it comes to these things. If they did we would never lift rates. The goal of my writings is to find the bull market somewhere and profit from it.
When the Fed is lowering rates or keeping rates low, there are so many great groups to own that the only real issue is to try to figure out relative valuation. If some groups move ahead of others, then others may play catch-up.
But when rates go higher, lots of groups just go down. Let's tick down why so many groups will be losers.
First, beware if you are buying shares of stocks that yield 3% because you want that bond market equivalent. Beware because that 3% will be pitted not against the first rate hike, but the third or fourth that will immediately be talked about in addition to the second one. It won't matter what the Fed says. If we have another strong set of employment numbers in January, we're going to get another rate hike. That's just how it goes. The same people who are constantly clamoring for rate hikes will be more emboldened, not less, because that's what always happens.
So if you are buying a stock with a 3% yield thinking it will protect you, others will disagree, mainly the big holders who are hiding in these stocks for yield who will now just sell and wait for higher 30-year and 10-year rates and put the money into those bonds.
Secondly, autos and housing will peak. The auto stocks are saying that right now. They don't go up on big sales numbers anymore because big money is betting they will peak when a higher rate cycle takes off. Housing is booming in a lot of places and I expect one more spurt as people figure out it is better to buy than rent, but getting credit is still hard unless you don't need it.
I think owning stocks related to these two groups will get very hard.
Health care stocks are companies that do well in slowing times. But the big money will take its cue from the Fed, which is saying that things are accelerating or they wouldn't move at all. So portfolio managers will dump these stocks en masse. It doesn't help that we are always one Hillary tweet away from a bear market.
Retail and restaurants actually fare OK in a higher-rate environment after the initial reset we are getting now because of higher wage growth, and, in the case of retail, warm weather. They fare OK because the public has more money to spend because of the higher wages. However, because of the Great Recession era mentality, that will take a long time to take hold.
So, what can we buy when the hikes start? You got some great clues today.
You saw certain stocks, mainly the financials, simply not go down that much. They didn't go down that much because institutions want to own them so badly that they don't come in. My trust was itching to buy some banks today, but the declines were meager versus the rest of the market because that's where the bull market will be as they make more money off your deposits.
You will like all of the highest growth stocks because so much money is dedicated to finding high-growth stocks that can maintain their strength despite a rate hike. Their earnings aren't impacted by higher rates.
When their stocks come down on days like today, you want to buy them, too. Think FANG -- Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google, now Alphabet (GOOGL) -- if you are debating what I am talking about.
And then one last one to think about, and it is the most important of all, one I have not talked about in relation to a rate hike. There are plenty of companies with stocks that will do nothing or go down in a rate hike scenario. These companies will either feel the heat from activists or they will have to merge to gain heft. These will be where the real value is -- finding the potential targets because the big companies know that the cheap money days are about to end and they have to take advantage of them the way you might be more willing to buy a house before the true rates surface.
A deal, for example, like Weyerhaeuser (WY), the giant wood company, buying Plum Creek Timber (PCL), a transaction announced this very morning, is, in part, motivated by the prospects that rates are going higher and it is important to beat those rates to the punch. Rumors this afternoon that Canadian Pacific (CP) might try to take over Norfolk Southern (NSC) or that oil and gas independent Apache (APA) might be acquired fit that bill, too.
Once again, though, I am not saying that I am sanguine about a rate hike. I am saying that I know what happens and it is not good for the vast majority of stocks. That's what you are seeing today, and all I want is for you to know it isn't revelatory and you'd better get used to it.
