Story Highlights
Right now, the markets are making one huge assumption. They are predicting the Federal Reserve will cut rates in two weeks.
And the assumption gives the markets a false sense of hope. If the Fed fails to deliver on that assumption, itll be a major disappointment for investors and possibly the start of a market sell-off.
While the economy and consumer spending are casting doubt on the possibility of further rate cuts, the assumptions havent changed.
But the truth is that lowering rates in a growing economy doesnt make sense.
Lets go over why the Fed may not cut rates next week, and the precautions you need to take for it.
The Fed is an independent institution in charge of ensuring two things maximum employment and stable prices. To do this, it adjusts interest rates.
When a lack of economic activity is inhibiting economic growth, the Fed lowers interest rates to encourage consumer spending and put money back into the economy.
And when the Fed needs to slow down the economy and keep a moderate level of inflation, it will raise interest rates.
Now, there are five reasons why I believe the Fed wont lower interest rates:
Simply put, a Fed rate cut to boost an already growing economy doesnt make sense.
The Fed wants to have these rate cuts available to support actual weak economic activity.
If the Fed lowers interest rates on a healthy economy, it will have fewer measures to take to support a widespread economic weakness.
Due to the stronger economy, we know that any rate cuts at this point are purely from pressure by investors. And this will set a precedent of investors pressuring the Fed to get what they want.
As I mentioned earlier, the Fed has two core mandates full employment and stable prices. Thats it.
Unemployment is at historic lows, so it isnt a concern.
It measures prices with inflation, which has stubbornly remained below its target.
But the Fed raised rates last year with inflation around the same level, so there is no reason to cut rates this month.
Except to please the market.
If the Fed gives in to the markets pressure, it would raise a lot of concern from members of Congress.
I dont think the Fed wants that kind of attention. So, it will hold off on a rate cut until the economy shows greater weakness.
I may be alone in this thinking, but I believe its important to prepare for what could be a very sharp market sell-off.
Which is why I have a way for you to hedge your portfolio today.
Everybody is waiting for next week. The Federal Reserve will hold a two-day meeting. Itll conclude on July 31.
Well know at 2 p.m. that day whether the Fed delivered on the markets assumptions of a rate cut.
According to the widely followed CME FedWatch Tool, traders are expecting lower rates, and they want to see two more by early next year.
If the Fed fails to deliver on these assumptions, it means the stock market must adjust.
Right now, the markets pricing in rate cuts from the Fed. This gives the market an added boost.
Without a rate cut in July, a market sell-off is certain.
The uncertainty of whether or not the Fed will cut rates is a major risk.
The Fed may follow through to please the markets. But I believe its best to take precautions for your portfolio.
The easiest way to do this is by buying a put option on the S&P 500 Index.
This puts you in a position to profit as the stock market dips if the Fed doesnt lower interest rates on July 31.
You want to add this put option now. As we get closer to the actual date, volatility will pick up, and it will make it difficult to find the right option.
Well buy a put option on the exchange-traded fund (ETF) that tracks the S&P 500: SPDR S&P 500 ETF (NYSE: SPY).
You can grab the October 18, 2019 $298 put option this morning for around $8 a share, or $800 a contract.
Remember, this is to protect your portfolio from a major event by the Fed next week. If the market takes a sharp drop, this put option will rise in value.
A 5% dip in the markets could send this option up by 50% or more.
And if the Fed cuts rates and the market rises, the rest of your portfolio will continue to climb. In that case, you can exit your hedge with a modest loss.
Whether the Fed cuts rates or not next week, this may be one of those times where it can pay to go against the crowd.
The Real Reason Stocks Could Rally in 2019? [sponsor]
A Wall Street legend whom millions have seen on Fox Business, CNBC and Bloomberg TV just made a prediction that has stunned the business world. WARNING: What he says contradicts everything youre hearing from Wall Street and the Main Street media. If you want to see how to make a fortune in 2019, its important you watch this interview right away.