The Great Rate/Rotation Debate


What’s the most important thing going on in the bond market right now? Something I call the “Great Rate/Rotation Debate.”

You see, ever since late 2014, interest rates have generally been falling. Consequently, conservative, higher-yielding, “Steady Eddie” stocks have been vastly outperforming.8-interest-rate

The general consensus driving those trades: Monetary policy is ineffectual. U.S. economic growth is slowing down. Weakness in the energy and commodity markets will continue to put downward pressure on inflation and foreign growth.

But starting in early July, interest rates began to bottom out. Plus, more aggressive, riskier, economically sensitive stocks began to take the lead.

The new narrative driving those developments: Fiscal stimulus will replace monetary stimulus, and it will succeed in jumpstarting growth. The worst of the commodity market downturn is over, allowing emerging markets to pick back up. If you don’t get on board, you’ll miss a fresh economic boom.

The debate technically doesn’t just impact interest rates, either. It’s sweeping up gold, the U.S. dollar, stocks, and more.

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The debate technically doesn’t just impact interest rates, either. It’s sweeping up gold, the U.S. dollar, stocks, and more.

If the trend of the 12-18 months through July 2016 is still intact, gold will win, and the dollar will lose. Conservative stocks will regain the lead.

interest-rateSo which is it? Who is going to “win” this Great Rate/Rotation Debate?

Frankly, I don’t have the answer yet. It’s too soon to tell. But if I were a betting man, I’d throw my weight behind the economic weakness/conservative investing camp.

After all, it would be extremely abnormal to see a brand new bull market and economic expansion to begin with asset valuations still near or at all-time highs … complacency at or near all-time lows … and the lack of a true stock market washout, like we saw in the last bear markets (which ended in 2003 and 2009, respectively).

We also haven’t yet seen much true pain in the underlying economy, like we saw with GDP, employment, production, and so on in the last two recessions. If anything, that process has just been getting started.

So keep that all in mind, when deciding whether to throw your hard-earned money at the stock market in willy-nilly fashion!

Until next time,

Mike Larson

Mike Larson is a Senior Analyst for Weiss Research, and is also the creator of the course “How to Profit From Rising Interest Rates”. A graduate of Boston University, Mike Larson formerly worked at and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.