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.

Interest Rates Went Up: What Is Next for Investing? PPT

The USA is decreasing its dependence on foreign oil through investment in sustainable fracking technology. As the US moves toward being the world’s number one producer of oil and natural gas, the price of natural gas in the USA has fallen dramatically. This is great news for US consumers and a boost to the US economy. Money that is not spent on oil as gas is available for investment that will help drive economic expansion. The US oil and gas industry is seeing boom times that are likely to continue. Manufacturing is up. And, the Chinese Yuan is being allowed to float more widely in daily currency trading. The issue of a cheap Yuan has plagued US industry for years as a cheap Yuan has helped Chinese companies sell for less in the USA. A more expensive Yuan will make US products more competitive both in China itself and worldwide. To invest in the dollar, an investor does not need to buy dollars and put them in the bank. He simply uses his dollars to invest in dollar denominated investments, especially in the USA.

A Greek financial collapse is back on the table and with that comes the possibility of an exit from the European Union. Investors are concerned that if Greece defaults on its debt, Italy, Spain, Portugal, Ireland, or even France might be next. If a “domino effect” set of financial collapses is likely a run on banks in Europe would likely be next followed by a shutdown in credit across the world. On one hand the wins by socialists in elections in Europe have upset the painfully ironed out debt relief deals now in place. However, a change of approach that would avoid painful austerity measures could avert a recession. The cost would be inflation and a still less valuable Euro compared to the dollar. So, here we are back to the premise that to invest in the dollar in the weeks, months, and perhaps years to come may well be a good idea. Although we are not suggesting any specific investments it will probably be a good idea to look at which business sectors will benefit from a stronger dollar, which business sectors will benefit from less expensive energy prices, and which stocks are likely to rise as a consequence.

More Resources