Pay Attention – The Fed Could Derail the Stock Market Next Week

[Jeff Clark's Market Minute]( Pay Attention – The Fed Could Derail the Stock Market Next Week Treasury bonds are crashing. The iShares 20+ Year Treasury Bond Fund (TLT) – which is designed to track the action in T-bonds with 20 years or more to go until maturity – is down almost 5% so far this month. That’s a huge decline for a fund that invests in government-guaranteed bonds. But you may not have noticed – what with the action in the “pot stocks,” the trade war headlines, the Supreme Court soap opera, and the broad stock market approaching new all-time highs. A modest rise in interest rates may not be enough to capture most investors’ attention. But it should. Recommended Link [This Weird New Tech Is Disrupting The $7.8 Trillion Finance Industry]( He picked the #1 stock on the S&P 500 11 months in advance and saw a 1,000% return. Now he says this will be the #1 tech play of 2018... and Silicon Valley insiders are already investing millions in it... [Click here for the full story]( - You see, at a certain point, rising interest rates are bad for stock prices. Higher interest rates eat into the profit margins for debt-heavy companies. Companies that have to re-finance large amounts of debt do so today at higher rates than at just about any time in the past four years. Higher interest rates also make companies less likely to borrow money to fund stock repurchase programs. A corporate CFO looks like a genius if they can borrow money for 2% and then use that borrowed money to buy back shares that are paying 3% dividends. The buyback helps support the price of the stock. It lowers the share count – which increases earnings-per-share growth. It reduces a costly dividend distribution. And the interest on the borrowed money is tax-deductible. All of those benefits go away if interest rates rise. The genius CFO now looks like a fool if they borrow money at 4% to fund the same sort of buyback program that was so smart a few months ago. But the biggest stock-market drawback to higher interest rates is that it creates competition for investors’ savings. For most of the past decade, investors had no other alternative for their savings than to invest in stocks. Bank accounts paid nothing. Treasury securities paid almost nothing. The stock market was your only choice. Now though, for the first time in 10 years, the yield on the 10-year Treasury note is significantly higher than the yield on the S&P 500. The 10-year note yield popped to 3.08% yesterday. Meanwhile the S&P 500 yields just 1.9%. And, if the Federal Reserve Board hikes their Fed funds target rate to between 2% and 2.25% next week, as expected, then Treasury bills will yield more than the S&P 500. That’s likely to make “cash” relatively more attractive, and stocks will be relatively less attractive. The financial media doesn’t seem too concerned about higher rates this week. They’ve largely ignored the steep selloff in Treasury bonds. But investors should start paying attention. Pretty soon, it’s going to be hard to argue in favor of paying 19 times earnings to invest in the stock market when there’s a respectable, lower-risk alternative. Best regards and good trading, Jeff Clark Reader Mailbag Where will you put your wealth when the Fed derails the stock market? Will you switch over to T-bonds? Let us know – along with any stories, questions, or suggestions – [right here](mailto:feedback@jeffclarktrader.com). This email was sent to {EMAIL} as part of your free subscription to Jeff Clark's Market Minute. [Click Here]( to change your delivery preferences or unsubscribe. © 2018 Jeff Clark Trader, 455 NE 5th Ave, Suite D286, Delray Beach, FL 33483, USA. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. It is not designed to meet your personal situation – we are not financial advisors nor do we give personalized advice. The opinions expressed herein are those of the publisher and are subject to change without notice. It may become outdated and there is no obligation to update any such information. Recommendations in Jeff Clark Trader publications should be made only after consulting with your advisor and only after reviewing the prospectus or financial statements of the company in question. You shouldn't make any decision based solely on what you read here. Jeff Clark Trader writers and publications do not take compensation in any form for covering those securities or commodities. Jeff Clark Trader expressly forbids its writers from owning or having an interest in any security that they recommend to their readers. Furthermore, all other employees and agents of Jeff Clark Trader and its affiliate companies must wait 24 hours before following an initial recommendation published on the Internet, or 72 hours after a printed publication is mailed.