On Wednesday, we’ll know whether the Federal Reserve is going to raise interest rates for the first time in nearly a decade. If so, it marks the end of the long experiment with near-zero interest rates started in 2008, and it could further destabilize the fragile bond and commodities market, as well as push stocks down out of their three-month consolation range.
The stakes couldn’t be higher.
Stocks have enjoyed a powerful, largely unbroken uptrend since the third round of the quantitative easing bond-buying program was launched in 2012. But since it ended late last year, equities have flatlined.
The connection between Fed stimulus and higher stock prices is well-documented.
Moreover, the Fed has never waited this long into an economic expansion to raise interest rates. Expansions rarely last longer than this, and there is evidence that the economy is losing momentum as corporate earnings growth stalls.
With all this in mind, here are six trades to make depending on what the Fed ultimately decides, with the assumption that a rate hike would be considered a negative, while no hike would be a positive. (To further muck things up, it must be noted that a “no hike” decision at the Fed’s September policy meeting had the opposite effect that was predicted: stocks weakened and the dollar rose.)
No Rate Hike: Exxon Mobil Corporation (XOM)
Energy stocks like Exxon Mobil (XOM) would be the big beneficiaries of any decision by the Fed to postpone rate liftoff into 2016.
This would ease the pressure on energy prices and set up an oversold rebound in the energy sector as investors priced in a reversal of recent U.S. dollar strength.
That’ll be great news for XOM, which hasn’t consistently traded above its 200-day moving average since 2014.
No Rate Hike: Newmont Mining Corp (NEM)
If the Fed decides to hold off on a rate hike, it will likely be blamed on a lack of progress by inflation back toward 2% — a tacit admission that we need to see higher inflation before they will take action.
Higher inflation will be good news for precious metals, which have been in a downtrend for years as price pressures have faded. A weakening of the U.S. dollar would help gold and silver prices as well.
This would be great news for beleaguered precious metals miners like Newmont Mining (NEM), which has been struggling to rise out of its August-October lows.
Edge Pro subscribers recently closed a 34% gain in December NEM calls this week.
No Rate Hike: Amazon.com, Inc. (AMZN)
If stocks were going to melt higher in the wake of a dovish surprise from the Fed, it’s likely that these stocks would lead the charge higher.
Rate Hike: U.S. Dollar Bullish Index Fund (UUP)
The biggest winner in a rate hike scenario should be the U.S. Dollar, and the U.S. Dollar Bullish Index Fund (UUP), which would enjoy buying interest thanks to a policy divergence between the Fed (which would be tightening) and its major peers, including the European Central Bank and the Bank of Japan (which are loosening policy).
If so, the dollar would likely take out its early 2015 highs and return to levels not seen since 2002.
This, in turn, would put further pressure on corporate earnings (because of the impact on foreign earnings) and commodity prices.
Rate Hike: ProShares UltraShort 20+ Year Treasury ETF (TBT)
Assuming the market doesn’t think a rate hike decision from the Fed is a policy mistake, long-term interest rates should start pushing higher on the expectation of a continuation of a series of short-term rate hikes into 2016.
That will weigh on long-term Treasury bond prices because of the inverse relationship between bond price and yield.
That will benefit the leveraged, inverse Proshares UltraShort 20+ Year Treasury ETF (TBT) that rallied earlier this year on rising rate hike odds, but has since settled near trading-range support.
Rate Hike: ProShares UltraShort Crude Oil ETF (SCO)
A Fed hike would, as noted earlier, be bad news for energy prices because of the dampening effect it would have on economic growth and the positive effect it will have on the U.S. dollar. A strong dollar, because it’s the currency used in the global oil trade, weakens crude prices because of the exchange rate effect.
With oil prices already testing 2008/2009 financial panic lows, a further breakdown could see a rapid return to 2003 lows.
That’ll benefit the leveraged, inverse ProShares UltraShort Bloomberg Crude Oil (SCO) fund.