Wall Street Does Not Want You To Read This Article

Wall Street Does Not Want You To Read This Article

The three largest stock markets in the United States grew 30% in 2013 before recording an average 12% gain in 2014. So far this year, the Dow Jones Industrial Average (DJIA), the Standard & Poor’s 500 (S&P) and the Nasdaq have gained an average of 5.5% - yet many investors are worried about the future of stock prices. Why?

The U.S. economy works in cycles. During the 1920s, the 1950s and until a few years ago, the stock market was the place to be. Most investors are aware of “the roaring 20s” and “the nifty 50s” stock market trends, but why have stock indices been on such a tear as of late?

The answer has everything to do with interest rates. When interest rates are low, as they are right now, it allows corporations to borrow money for practically nothing. Low interest rates let companies buy materials, build factories, hire employees and buy out competitors with government money, all for less than 1% interest.

Now that the Federal Reserve has stated that it could raise interest rates as early as June, however, publicly-traded companies are on the hot seat. What will happen to Wall Street once interest rates start to rise?

No one knows, and you should ask any financial adviser or company that attempts to impress you to show you their crystal ball. The best way for a reputable financial mind to “predict” the future of the U.S. economy is by studying past financial trends. Take, for example, the financial trends of 1960 through 1980.

Stock investors saw sufficient gains during those years - on paper. The Dow grew by about 69% during those 20 years; this was a respectable, albeit not uber-impressive, amount of growth. What hurt stock investors between 1960 and 1980 was not a lack of growth in stock prices; it was the dollar’s devaluation.

Interest rates hadn’t moved substantially for a solid 15 years prior to 1960, so the dollar had been printed, borrowed and spent with reckless abandon. Once the Federal Reserve decided to raise interest rates in 1960, everything changed.

Companies no longer had carte blanche to borrow money from the government, so it was harder to make money with stocks. Companies that saw profits on paper often still ended up losing money because of inflation. Between 1960 and 1980, the Fed’s prime lending rate grew from 4.5% to 21.5%, and by the time investors realized they could earn double-digit interest in checking and savings accounts, the dollar had already lost 65% of its value.

Why doesn’t Wall Street want you to know this?

The Federal Reserve could raise interest rates as soon as June, meaning companies who have been sucking on the teat of the Federal Reserve will finally have to buy the cow instead of getting the milk for free.

Stock prices fell, on average, 3% for each 1% interest rate increase during the 60s and 70s. If a similar pattern were to emerge during the current cycle, it could be catastrophic for stock prices and stock owners, not to mention the companies themselves.

If your portfolio is “stock-heavy” and you’d like to diversify your retirement accounts before interest rates go up, call 401kRollover.com at (800) 767-1423 today or visit www.401kRollover.com for free advice on implementing strategies that could allow you to flex your financial muscle no matter what happens with U.S. stocks once interest rates rise.