The Fed is Bluffing: Here’s how it can make you rich!
Unless you’re living under the proverbial rock you know that markets have been falling off a cliff as of late.
In fact, if you can afford to live under an actual rock you’re probably doing better than most.
Portfolios are getting decimated as markets reprice stocks based on the Federal Reserve revising rate projections upward.
For 2022 to 4.4% from 3.4% in June, that number Rises to 4.6% from 3.8% in 2023.
It was also raised higher for 2024 to 3.9% from 3.4% in June and is expected to remain elevated at 2.9% in 2025.
I’m sure many investors are asking themselves what to do!
The Historical Opportunity
It’s important in this discussion to realize, that there’s no such thing as unprecedented times.
If history teaches us anything it is that there is nothing new!
Rather there are patterns that repeat and general trend lines, and if we identify these patterns and trend lines we’re better able to deal with reality. As investors, we’re much better off with this understanding than processing every new event as a one-off that’s never been seen before and therefore cause for panic.
Now let’s look at the historical instances when the S&P 500 fell 23% or more in the first 9 months of a year, as it has in 2022.
In the last 70 years, this has happened 10 times. In 8 of the 10 instances, the market was down for the year in which the 23% drop happened, so there’s a high likelihood this will be the case this year as well.
What’s interesting is that in 7 out of 10 instances, the very next year was up an average of 18%.
Therefore, if history repeats itself we could be looking at a strong Rebound in 2023.
Of course, past performance is no guarantee of future results, but it’s worth noting that in every instance where the market dropped 23% or more, it eventually recovered and went on to new highs.
Given this is the historical record which as far as I can tell is the best available predictor for what the future holds, then it only makes sense in my mind to view this recent drop not as a challenge but a buying opportunity.
The FED is Bluffing!
The U.S runs on debt. In fact, it currently has over 30 trillion dollars of debt, and raising rates makes future borrowing and some existing debt much more expensive to finance.
Therefore, I’m calling BS when the FED says that they’re going to keep raising rates until inflation is under control. The truth of the matter is they will raise rates as much as they can without bankrupting the US government.
If inflation doesn’t come under control they’re not going to keep raising rates indefinitely. Rather, they are more likely going to change their mandate from 2% inflation every year to some other number that is higher.
That said, I do think inflation will fall from where it is right now. Maybe it won’t go back to 2%, but we’re already seeing commodity prices falling, and there are some secular elements to innovation that are by nature deflationary and this innovation is only accelerating all the time.
Stock Market Opportunities
Across the board, there are opportunities not just in growth stocks but in dividend stocks as well, not just in large caps but in small caps as well.
Of the stocks and cryptos in PIF’s Watchlist, nearly 80% are currently in “Buy” territories with their prices. The average upside amongst growth stocks in our watchlist, the difference between the current price and the selling price we assigned to it, is close to 65%. Consider the following stocks in PIF’s portfolios:
- CleanSpark, Inc. (CLSK) is a Bitcoin mining company. It has a book value of close to $9, meaning if you were going to liquidate the company you would expect to receive $9 per share of the company. Currently, it’s trading close to $3 per share. It’s expected to have revenue of more than $200 Million next year but it’s trading at a market cap of $150 Million today.
- Tesla (TSLA) is a company that I’ve owned for many years and have been increasing my position in. I believe it to be one of the most Innovative companies in the world and its products are just getting better and better. It currently has a Forward PE of 46. The last time it had a Forward PE as low as 46 was in 2019 right before it went on a 10x run.
- Novartis (NVS) is a company that I have in the PIF Dividend Portfolio, it’s a large multinational pharmaceutical company with products in many therapeutic areas. It has more than 150 projects in various stages of clinical development which implies a big opportunity for growth. It is trading at a Forward PE of 12, which is less than the average forward P/E in the S&P and it has an annual dividend north of 4%.
Needless to say, opportunities abound in the market today.
Investors today are basically like Shoppers who enter a store and find everything 30% to 50% off!
If you are a seller this is not too great and you should probably not be in the markets at all if you don’t have a long-term investment horizon.
However, for net buyers with long-term investment horizons, I believe this is an opportunity!
I for one am going to continue to buy opportunistically and invest in companies I believe are trading at a significant discount to intrinsic value.
As always, do our own due diligence.
If you’d like to follow what opportunities we’re investing in, make sure to take advantage of the offer we have running until the 1st of October wherein every annual membership to PIF comes with 2 free months of membership, and our course “ The Practical Guide to Screening Stocks for Sharia-Compliance” absolutely FREE. Be sure to become a PIF member today!