Posted January 04, 2022
By Zach Scheidt
[CHARTS] Ticking Time Bomb Meets Bond 007
There's some serious drama going on in the market as we kick off the new year.
It's almost like a classic James Bond scene...
On the surface, we're treated to a beautiful landscape with the S&P 500 trading near all-time highs.
But behind the scenes, chaos is building… Explosives are set to go off… And car chases will ensue down windy market streets.
The plot will take some twists and turns. But eventually, the hero will survive and win.
Today, I've got a couple of high-drama charts I want to show you. These charts tell you exactly what's happening behind the scenes in today's market.
And if you follow the plot that these charts are showing us, you can emerge the hero as we move through this dramatic shift in the overall market!
The Sinister Selloff: Here's What's Causing the Pain
Every good drama needs a villain. And in today's market, that villain is the unavoidable problem of rising interest rates.
Yesterday we talked about inflation and how it can hurt the value of your retirement savings. The Fed turned a blind eye to this risk for far too long and now has to play catch up.
Unfortunately, the Fed only has one tool to fight against inflation. Its only option is to raise interest rates, which will help to encourage people to save their money rather than spend it and drive prices higher.
Up to this point, the market didn't believe that the Fed would actually follow through on raising rates. At least not for long...
But now, we're seeing a dramatic shift in that perspective. And you can see that shift taking place in the market today!
The chart above for the iShares 20+ Treasury Bond Fund (TLT), an ETF that trades in line with long-term U.S. government bond prices. (I shared this post on my Twitter account earlier today).
As you can see, this chart is breaking down. That tells us two important things:
- First, "safe" bond investments are falling. And if you're holding long-term Treasury bonds in your retirement account, you need to get out — now!
- Second, interest rates are rising. And that's causing some big ripple effects in the market.
Higher interest rates drive the price of speculative stocks lower. With higher rates, there's an opportunity cost if you have to wait for years before a speculative company starts generating profits.
Higher rates also cause pain for many traditional retirees. That's because most wealth managers have continued to recommend long-term Treasury bonds even when these bonds are vulnerable and pay next to nothing in interest!
(Don't get me started on the wealth management industry... Often the only wealth those guys are concerned about is their own!)
A Market Hero Emerges: Here's How to Profit
Despite the carnage higher interest rates cause in some areas of the market, there are some big winners as well!
Take a look at the chart of the financial sector below!
Remember, financial companies (especially banks) typically make bigger profits when interest rates are higher. That's because banks can lend cash to individuals and businesses at higher interest rates.
This is an especially good time for banks because most of these companies have plenty of cash on hand. The financial system is much more stable than in years past when banks were over-extended.
So there's room for more loans to be made — and new loans should bring in more interest income.
And since the economic recovery is still going strong, banks have no shortage of potential customers who will want to borrow. After all, companies can borrow money right now to build bigger facilities, hire workers and grow their underlying businesses.
What better time for banks to lend money than when businesses are expanding!
So as inflation persists, interest rates are ticking higher. And that theme is extremely important for retirees to pay attention to.
If you’re proactive, this trend can be your friend and help you grow your wealth.
But if you ignore higher rates, you could find yourself like many other retirees wondering why their bonds are worth less while trying to come up with enough income to offset inflation.
Let's take the first option.
Capitalizing on the trends the market gives us will put you in a perfect spot to grow your retirement wealth, enjoy the best years of your life and focus on the things that really matter.
Here's to living a Rich Retirement,
Editor, Rich Retirement Letter