More Rate Hikes? More Like Profit Hikes

I hope you’ve had a nice August. If you have, it’s not for lack of bearish headlines, financial and otherwise.

It seems like the “gloom and doom” school of journalists are shouting louder than ever… desperate to get our attention while we’re off on that last beach vacation. Or moving the kids into their college dorms, in my case.

If the negativity ever starts to get to you, do what I do…

Ask yourself: Did the last apocalypse ever come?

For example, people were calling for an earnings apocalypse. “Earnings are going to fall off a cliff” – so the story went.

Well, now we’re most of the way through second-quarter earnings season. 65% of S&P 500 companies are beating their sales estimate – with 79%beating on earnings.

“But wait! What about… China? And Japan? And Russia?”

Look, I feel for people there, I really do. Russia’s central bank just jacked up their interest rate to a whopping 12%. And we thought it was bad here!

But it’s a mistake to jump from that to saying, “Oh, it’s going to pressure us to raise rates again.”

Here’s why…

Reason #1: The Inflation Report Was Encouraging

When the latest Consumer Price Index (CPI) was released last week, we learned that inflation’s now running at 3.2%. That’s not a huge triumph over expectations for 3.3%, but it’s still better than expected.

And let’s not forget what it was like this time last year: 7%–8%.

However, what I found most promising was that all 21 categories were down year-over-year.

Many of the categories began falling last summer after inflation peaked, but a few remained persistently high – especially shelter costs and eating out. Now ifnlation is down over last year in a perfect 21 of 21 categories.

Reason #2: The “Spread” is Too High

So, now we’re running at 3.2% inflation. The Federal Reserve has said, time after time, that their goal is to get us to 2% inflation. At least the goal is in our sights now.

But importantly, the Fed funds rate is at 5.12%.

So, that’s a full 1.92 percentage points above inflation…

And that hardly ever happens.

In fact, this is the largest spread between interest rates and inflation since 2009:

July 2009, to be precise.

And what did stocks do after a spread like that?

Well, they’re up 383% from there. Because sooner or later, interest rates are bound to “normalize,” as economists say.

Reason #3: No Need for a Hard Landing

Economists and pundits also love to talk about when the economy will come in for a “hard landing.” It hasn’t really happened, so that’s when they start to talk about making a “soft landing.”

But we might not need to make any kind of a landing.

As I pointed out earlier, the vast majority of companies are beating earnings and sales expectations.

We can chalk that up to analyst estimates being too low. Or companies issuing guidance that’s too low.

But as a stock-picker, I’d much rather see 80% beating expert expectations than 80% failing expectations… that’s for sure.

Add it all up, and the Fed no longer has any reason to raise rates. The picture may not be as pretty in China or certainly Russia. But here, the Fed’s strategy is working.

And let us not forget:

Reason #4: We Owe Interest, Too

Excuse me if I whip out my calculator one last time. Running numbers – it’s what I do.

The U.S. government owes over $30 trillion as our national debt.

So, every percentage point the Fed raises rates is another $300 billion of interest that we have to service.

This is why, as soon as the Fed can be satisfied that inflation is finally tamed, they’ll say: “We’re all done!”

In the meantime, we’re just weeks away from the strongest season in the stock market: October–December.

We need to be ready for the Big Lift that’s coming, powered by all these factors I listed off here today.

In my Quantum Edge services, I’ve taken advantage of the choppy summer market we’re in now.

We took some chips off the table, steering ourselves away from the volatility as we could… which left us with capital we could use to snap up the highest quality stocks on a pullback.

Volatility can be scary. But one thing is certain: It produces some of the best buying opportunities you can get.

The best stocks – those with fortress-like fundamentals, strong technicals, and Big Money inflows – get sold in volatility just like the worst stocks. That’s where you find the valuable coin someone tossed aside not realizing how much it was worth. You can buy it and then sell it for a lot higher prices down the road.

Money’s rotating out of previous leaders into the new class of winners. I can’t wait to see what opportunities come across for us next.

And if you want to join us for the next trade alert, you can learn more here.

Talk soon,

Editor, 
Jason Bodner’s Power Trends