Fed Doesn’t Disappoint, Giving This Asset a Boost
The Federal Reserve has spoken…
And while they didn’t give markets the instant gratification they were looking for with a rate cut, they still didn’t disappoint.
In fact, the Fed all but guaranteed that lower interest rates are coming soon, perhaps as early as the next FOMC meeting at the end of July.
Of course the dollar tanked right off the bat, since lower interest rates tend to undercut the strength of the dollar.
Stocks and gold, however, soared higher along with another maligned asset class that’s about to make a big comeback.
A Great Day for Investors
The market reaction was better than many investors expected, with no change in policy.
But Fed Chairman Powell went out of his way to express growing concern about our slowing economy. He stated flat out that:
“Many participants [on the Fed] believe that some cut to the fed funds rate would be appropriate in the scenario they see as most likely.”
Lower interest rates are basically a done deal. In fact, the odds of a rate cut at the Fed’s next confab at the end of July improved dramatically, signaling close to a 100% chance of lower rates.
But Gold and U.S. Stocks Aren’t the Only Big Winners
Another asset class that stood out with big post-Fed gains: emerging markets (EMs).
EMs have been out of favor recently due to trade war fears as well as the stronger dollar this year.
But as you can see in the chart above, the dollar and EM assets, both stocks and bonds, have a very strong inverse correlation.
That’s fancy financial-speak that simply means they move in opposite directions.
Like opposite ends of a seesaw, EMs go up when the dollar goes down, and vice versa.
As you can see above, EM stocks and bonds had a very strong run from 2004–08 when the dollar was weak. In 2015 EM assets sold off as the dollar strengthened. EMs enjoyed a big rebound rally in 2017 as the dollar declined, but last year the buck’s rise pushed EMs down yet again.
Your New Buy for Today
The Fed’s move could be a game changer for the buck and EM assets, especially EM bonds. The Fed has declared easy-money days are here again, practically guaranteeing lower interest rates.
That’s bullish for bond prices, which move opposite of interest rates, just like the relationship between the dollar and EM assets.
At the same time, the dollar is likely to fall into an extended decline once again, because lower rates and a weaker economy will be a twin drag on our currency.
Emerging-market bonds, on the other hand, should benefit big-time, getting a double-boost from 1) lower rates and 2) a weaker dollar.
An easy way to cash in on this trade is with the SPDR Emerging Markets Local Bond ETF (EBND), which tracks fixed-rate local currency debt of EM nations,and yields an attractive 5.2%
What goes up must come down, and as both interest rates and the dollar fall, I expect EM bonds will shine.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch