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Steve's note: Today, I'm continuing my series laying out the incredible forces that are working together to drive stock prices on what could be the greatest three-year run of our investing lifetimes. Read Part I of the series here.
Tuesday, March 5, 2013
As of this year, we've been handed the playbook...
We know the plays. We know what the other team is going to do. And we know how they're going to do it – almost exactly.
As I showed you yesterday, when interest rates are low, stocks tend to increase in value. Based on history, with interest rates this low, stocks have room to climb nearly 100% from today's levels.
And now we know how long interest rates will stay low... The Federal Reserve – the group that sets short-term interest rates – has actually told us what it will do.
Here's the playbook...
In December, the Federal Reserve established specific targets for when it will raise interest rates. It said it won't raise interest rates "as long as inflation isn't forecast to rise more than 2.5% in the future and as long as unemployment remains above 6.5%."
These two things won't happen before 2015, at least...
To show you why I say this, let me share the Fed's guesses (because this is what it will base its decisions on):
And let me also show you the consensus guesses of the world's top economists:
As you can see, we are not (yet) in danger of breaching the Fed's two targets that would trigger a rate increase.
Even if we reach those targets, the Fed may decide not to raise interest rates at all!
That's according to Janet Yellen, Vice Chair of the Federal Reserve. Just a few weeks ago, she announced that 2.5% inflation and 6.5% unemployment are just "thresholds for possible action, not triggers... When one of these thresholds is crossed, action is possible but not assured."
The Fed has made it clear many times that it will not raise interest rates until it's nearly too late. Federal Reserve Chairman Ben Bernanke is a student of the Great Depression. He knows the Fed raised rates too early back then, cutting off a potential recovery. He also knows of Japan's experience in 2000. It raised rates from zero too soon... again, cutting off the recovery.
Bernanke is not going to make the same mistakes. That much is clear.
If the professional economists are correct, inflation could stay low for a few more years. And this is extremely important... You see, low inflation is fantastic for stock prices. Take a look at these results since 1950:
In short, you make huge gains in stocks when inflation is low. And you don't make any money in stocks when inflation is above 5%.
Overall, stocks have returned about 7.4% a year since 1950. At 13.2%, stocks return nearly double that amount in periods of low inflation...
Low interest rates and low inflation are like rocket fuel for the stock market.
Of course, it won't be a straight shot higher. There will be corrections along the way. But you don't want to be on the sidelines.
The coast is clear for at least the next two years. Even better, we have plenty of rocket fuel... And it will help propel stocks to levels higher than anyone can imagine.
P.S. Tomorrow, I'll show you why, by the end of 2014, we could see another dot-com-style boom in stocks all over again.
Steve expects stocks to rise 95% in the next three years... and possibly much more than that. Get the full story in Part I of this week's series here: Stocks Could Be Starting the Best Three-Year Run We've Ever Seen.
AN AMAZING UPTREND IN HOTELS
Today's chart shows the American economy is a heck of a lot better than the pessimists would have you believe...
Over the past few years, we've pointed to the soaring shares of banks, home improvers, and transportation stocks as proof the U.S. economy couldn't be doing all that bad. We've also featured commentary on Wyndam Worldwide (NYSE: WYN). What happens with this company is extremely important...
Wyndham Worldwide is one of the most important stocks you've never heard about. It's the world's largest hotel chain. Brands here include Super 8, Howard Johnson, Ramada, and Days Inn. Wyndham owns several "upscale" hotel chains as well.
The profits and share prices of hotels rise and fall with America's propensity to take business trips and vacations. As you can see from today's chart, the stock has enjoyed a huge uptrend since late 2011. Just last week, the stock hit an all-time high. It's boom times for hotels... which leads us to say things aren't just better than pessimists would have you believe... they're a whole heck of a lot better!
– Brian Hunt
In The Daily Crux