The Weekend Edition is pulled from the daily Stansberry Digest.
We'll start this essay with the latest news from the Federal Reserve...
On Wednesday afternoon, the Fed raised its benchmark interest rate by another 75 basis points. This came as no surprise to Wall Street.
The move will bring the federal-funds rate range – which most directly matters for banks and then filters throughout the economy – to between 3% and 3.25%. The change makes borrowing costs in the U.S. the highest they've been since before the 2008 financial crisis... and it's the first time rates have eclipsed their previous cycle peak since before the dot-com bubble...
Maybe it's just a coincidence?
As is a quarterly custom, the Fed's board members also published their updated projections for interest rates (the so-called dot plot), gross domestic product ("GDP"), inflation, and unemployment through the end of the year and for the next two years.
Here's where it gets interesting...
The projections showed a central bank that is acknowledging a "higher for longer" interest-rate environment. It foresees basically no economic growth this year (a 0.2% rise in real GDP) along with lower inflation but higher unemployment in 2023.
The Fed projects between another 100 or 150 basis points of rate hikes by the end of this year... and maybe more increases in 2023, while not lowering rates until 2024.
In the meantime, its experts think unemployment will rise to 4.4% over the next two years, up from a record-low 3.7%. That's significant news and would mean more than 1 million lost jobs – the sort of recession that no one can deny or ignore.
Take these for what they are: projections by a group of people who have gotten a lot wrong over the last two years. Still, it's what the string-pullers of monetary policy in the United States are thinking today... And it matters to the markets.
Mr. Market's immediate reaction was to go from a muted positive day to falling hard, fast... The benchmark S&P 500 Index and the tech-heavy Nasdaq Composite Index were each up about 1% before the Fed's policy announcement... then were down 1% on the day just five minutes later.
After a brief rally during Fed Chairman Jerome Powell's post-meeting press conference, selling intensified into the close of the trading day and continued Thursday, with the S&P 500 slipping back below a 20% loss for the year for the first time since June.
A lot of people will parse the pluses and minuses of the Fed raising rates by 75 basis points, its economic projections, and what Powell said or didn't say in his press conference. All of those are worthy topics of financial discussion, and they influence the markets.
But what did we see? A reminder not to forget the bigger picture: The big story of 2022 – and the ongoing bear market in U.S. stocks – hasn't changed yet.
First, inflation remains a worldwide problem...
And, in response, dozens of central banks are raising interest rates, which will slow the global economy (and hopefully inflation, though there are no guarantees). But the U.S. is leading the charge, with Powell intent on raising rates "until the job is done."
At the same time, the Bank of England this week raised its benchmark lending rate by 50 basis points to 2.25%, still lower than the Fed's equivalent lending rate... And U.K. inflation is about 10%.
Many of the world's other major economies are trying to catch up... or are dealing with worse problems, as in the case of Turkey and Argentina, which have inflation rates of about 80%. You read that right.
The uncertainties about high inflation's staying power and concerns about an energy crisis this winter, particularly in Europe, are also lingering in millions of people's minds.
Here's why this context matters to the stock market...
This connect-the-dots game starts with the U.S. dollar. As a result of the Fed raising rates, the dollar has been strengthening versus other major world currencies.
This past Wednesday, the U.S. Dollar Index ("DXY") was up another 1%, hitting a new 20-year high. It remains in a strong uptrend, up 19% over the past year (and trading above its 50-day moving average nearly the entire time)...
Looking broader, with the move on Wednesday, the Dollar Index hit a level not seen since June 2002.
We're not discounting the fact that 40-year-high inflation is eating away at the purchasing power of dollars. But relative to other currencies, the dollar is getting stronger. (For example, the Bank of England started hiking rates from negative territory... and Japan is keeping low rates in place despite its fastest inflation-rate increase in eight years.)
Now, in the spirit of using relevant history rather than just any history, let's explore this 20-year high in the U.S. dollar a bit more... and the next important dot in this game...
A strong dollar matters to stock prices...
The last time the U.S. Dollar Index reached today's levels and was hitting new highs, like today, was in May 2000.
That was just before the S&P 500 topped during the dot-com bubble... and a few months after the Nasdaq Composite Index peaked (and around the same time tech stocks had a classic bear market rally).
So, not good company...
Plus, as we shared last week, the dollar and the S&P 500 are now inversely correlated. When one has gone up this year, the other has gone down and vice versa – all year long... If you take nothing else from today's essay, make it that relationship.
This is driving the stock market's direction...
As Stansberry NewsWire editor C. Scott Garliss wrote this past Monday, the dollar – and associated bond yields, which are also rising to new highs lately – will determine the near-term direction of the stock market...
The Fed's primary weapon in its fight against inflation is to hike interest rates to increase the dollar's buying power. So, by increasing yields, the central bank is making U.S. sovereign debt a more attractive investment.
You see, 10-year U.S. Treasurys are long-considered one of the safest investments in the world. That's because our government has never defaulted on its obligations. And when money managers at home and abroad see the payout potential increase, they must convert into dollars to buy U.S. sovereign bonds.
The process makes the greenback increasingly scarce... As more individuals and asset managers clamor for the same resource, its value rises. That's important from an inflation standpoint. A more valuable dollar means it should take less of them tomorrow to buy the same amount of a particular item... like, say, a gallon of gasoline, as it did today. In other words, a stronger dollar weighs on inflation.
Yet, until there's more certainty about the Fed's end goal with interest rates, the yield on sovereign debt is likely to head higher.
So the Fed continues to hike rates – and to higher levels than those in other major economies. This raises the relative strength of the dollar... and Treasury yields, too. This all means the headwinds blowing in the face of U.S. stocks haven't eased yet.
Also remember, the companies comprising the S&P 500 Index get a good chunk of their revenues from abroad. We already stated that inflation is happening worldwide. But a stronger dollar eats into potential profits while the global economy will be slowing down.
As Scott and his colleague Kevin Sanford shared in a NewsWire post earlier this week, this scenario is fuel for the potential "earnings recession" we talked about recently... and that Joel Litman of our corporate affiliate Altimetry wrote about in last Saturday's Weekend Edition.
As Scott and Kevin wrote...
Keep in mind that 30% of S&P 500 companies' earnings are generated abroad. This means that a stronger dollar serves as a headwind for profits. This results in downward earnings revisions – and a likely decline in markets in the near term.
Eventually, the tide will turn. When it does, a weaker dollar (again, compared with other major currencies) will likely be a big tailwind for U.S. stocks. It's one of the signs the trends of 2022 will be changing.
But we're not there yet.
In the meantime, Joel recently went on camera to share an urgent warning...
In short, Joel says a new financial crisis has taken hold of America – but it's not the one you'd likely expect. This crisis isn't arriving next week, or even next month. According to him, it's already here...
And it has the potential to devastate millions of Americans' retirement savings.
But the fact is, you can always make money during a crisis...
That's why this past Thursday, Joel teamed up with Chaikin Analytics founder Marc Chaikin to share their investment "playbook" for how to protect and grow your wealth today.
They unveiled a unique discovery – a rare type of stock that is known to soar during moments of mass fear and volatility. Joel found one such stock that jumped 160% while the Dow Jones Industrial Average was still coming out of a bear market in 2020...
Another could have brought in a 183% gain for investors – during the worst year for stocks in a decade. And one delivered almost 800% in just six months following the COVID crash.
Joel and Marc are preparing for a tidal wave of these kinds of opportunities as the year unfolds...
But with the crisis that's already stirring – and the ongoing threat of recession, inflation, and more – it's imperative that you know how to position yourself to profit... and that you steer clear of the sectors that are the biggest threats to your hard-earned capital.
This rocky market isn't through with us yet. If you're wondering which stocks are worth holding right now – and which potential "loss leaders" you should sell immediately – we urge you to watch the replay of Joel and Marc's "Financial Lifeline Event" right here.
Editor's note: We're in the midst of a dramatic financial shift... But this isn't a time to panic. If you're on the right side of this trade, it could erase the last eight months of stock market losses. To find out why, make sure you watch the brand-new discussion from investing powerhouses Joel and Marc... where they reveal what could be the boldest prediction of their careers.
They also named a handful of stocks that you need to buy now (and some stocks that you should avoid completely). If you missed their must-see event, you can catch a replay right here before it goes offline.