The long, often boring and sometimes painful wait for the U.S. Federal Reserve to raise interest rates is over. On December 16, 2015 the Federal Reserve raised a key interest rate for the first time in almost ten years. The Washington Post covered the story.
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The Federal Reserve voted Wednesday to raise interest rates and begin pulling back its unprecedented support for the American economy, ending an era of easy money that helped save the nation from another Great Depression but has yet to produce a full-throttled recovery.
The unanimous decision will nudge the central bank’s benchmark interest rate up from near zero by a quarter of one percent to a range of 0.25 to 0.5 percent. The move is small, but it amounts to a vote of confidence that the American economy — dogged by volatile oil prices, a slowdown in China and weak global growth – will stand resilient. But the Fed also pledged to wean the nation off its stimulus slowly, an acknowledgement that further progress is not guaranteed and that the central bank is operating in uncharted territory.
The Federal Reserve under its previous chairman, Ben Bernanke, was largely responsible for not only rescuing the U.S. economy from the worst recession since the Great Depression but also preventing a slide into financial chaos. Due to the fragility of the U.S. and global economy the Fed has been cautious about raising rates for fear of choking off the recovery. However, as the U.S. economy strengthens there is the risk of inflation and thus the Fed intends to raise interest rates sufficiently to stem inflation while still not damaging the economy. So, interest rates went up. What is next for investing?
Interest Rates and the U.S. Dollar
The U.S. dollar has gained in value against most global currencies in the last five years due to the increasing strength of the U.S. economy while Europe, Asia and much of the developing world have struggled. Bloomberg Business shows the BCWIUSD:IND, the U.S. dollar versus a basket of currencies over the last five years. The index has risen from 90 to 120, a one third increase for the U.S. dollar.
USD vs Basket of Currencies
Unfortunately, in the world of currencies no good deed goes unpunished. A stronger dollar brought on by a strong economy made U.S. manufactured goods paid for with local currencies more expensive throughout the world. Coupled with economic problems from China to Brazil to Russia to the EU this has slowed U.S. manufacturing. Higher interest rates commonly lead to a more valuable currency. However, it appears as though the increase in value of the dollar has been priced into the Forex market in anticipation of the rate increase.
Where to Invest
The U.S. dollar is riding high so there might be a temptation to invest offshore. However, the U.S. stock market rose after the announcement that interest rates went up. What is next for investing in the U.S.A. and offshore? The old saying attributed to Baron Rothschild is to invest when there in blood in the streets, namely invest when things are at their worst. Thinking of this advice, Brazil, China, Russia and the U.S. energy sector come to mind. One can invest directly, invest via a fund or invest via a company that does business there. Chaos in regions across the world can get worse instead of better but crude oil and natural gas can only go just so low. Thus our vote for bottom feeding is the energy sector. Investor Place writes about oil stocks to load up on for 2016.
I’m terrible at predictions so will refrain. I do know that some of the calmer, more experienced observers like the CEOs of Chevron (CVX), Conoco Phillips (COP) and Saudi Aramco all think oil will be higher in 2016.
T. Boone Pickens is still predicting $70 next year, but admits that while he is usually right on direction, his timing can be off.
The three suggested stocks are WPX Energy, Tidewater and Diamond Offshore Drilling. The author’s advice is to keep your positions small to limit losses and count on a huge turnaround to insure profits. As always do your own homework before investing.