Wall Street Is Hiding the Best Opportunities

'Higher for longer' is bad news for equity investors...

In its most recent meeting, the Federal Reserve decided to keep the federal-funds rate at a range of 5.25% to 5.5% – a 22-year high. Unfortunately, it also signaled that interest rates could climb even further.

Higher rates mean most companies will lose out on future cash flows. But the bigger issue is that the Fed is expecting to keep rates "higher for longer"... meaning this environment isn't going away overnight.

Stocks are valued based on future cash flows. If cash flows are expected to rise, valuations will rise with them. If cash flows are expected to shrink, valuations will fall.

And today, financing costs – one of the biggest drivers of valuations – are rising across the board thanks to the Fed's rate hikes...

We can see this through U.S. Treasurys, which are a good proxy for financing costs. The 10-year Treasury rate recently climbed above 4.5% for the first time since 2007.

Said another way, if a company wants to borrow money for 10 years, it will cost more than at any time since the Great Recession. It's a similar story with short-term Treasury rates.

Corporate costs are rising across the board. It seems they're going to stay high for a while. That's horrible news for stock valuations... And it means finding a safe haven in the equity market will be a challenge.

Savvy investors won't put all their eggs in the stock market basket going forward. As we'll explain today, there's another place investors can turn to – and it will be far more secure in the coming downturn.

U.S. corporations have a lot of debt coming due in the next few years...

Many will have to refinance to avoid going under. But in today's high-rate environment, they'll be forced to do so at a higher cost.

That makes for a shaky financial picture for these companies... and as a stockholder, it's exactly what you don't want to see.

So in turbulent conditions like these, top-tier investors like Warren Buffett and Howard Marks turn to the bond market.

Most folks tune out the minute they hear talk of bonds and credit. And bond investors do nothing to encourage newcomers. They use complicated jargon and do their best to keep the credit market as insular as possible.

They want to keep the secret of bond investing to themselves.

Bonds offer regular, fixed interest payments over the duration of your investment. The issuer of the bond is also contractually obligated to return the principal amount – or "face value" – at maturity.

You won't find security like that in stocks. Equities can be volatile and are dependent on a company's performance and broader economic conditions.

Another major advantage of bonds is their yield...

If the market gets tough, companies can cut their dividends. Bondholders, on the other hand, still receive their predetermined interest payments.

And when interest rates are elevated like they are today, bonds typically offer substantial yields. This provides high returns even when equities are declining.

As stock valuations fall, sometimes perfectly safe bonds take a hit, too... offering investors the opportunity to scoop them up at a significant discount.

That's exactly what we're seeing today. Even Wall Street is finally starting to take note.

But in typical Wall Street fashion, the 'experts' are only seeing half the picture...

Notable investment-management firms like Columbia Threadneedle are advocating for shorter-duration bonds. They claim that short-term debt is an appealing prospect in this high-rate environment.

We disagree. By investing in bonds that mature in three, five, or seven years, investors can benefit from the current high-rate environment for much longer than they would with short-term bonds.

Plus, we already explained that refinancing is tough when rates are high. It's more strategic to invest in debt that won't need refinancing for several years.

If companies refinance today, their interest payments will go up... and that means they'll have less money available for all other obligations.

The safest companies are the ones with no debt due in the short term. They can bypass the high-interest phase. And they could even refinance in a more favorable climate later on.

Rising interest rates are sending companies' borrowing costs through the roof. This will lead to reduced profitability, especially for those with significant debt... and investors will punish stocks across the board.

With a recession on the way, this is the time to get defensive in your portfolio. If you're looking for a buffer against the coming equity carnage, the bond market is an ideal place to start.

Just don't listen to those institutional investors trying to steer you wrong...

Regards,

Rob Spivey
October 5, 2023

P.S. Altimetry founder Joel Litman and I recently sounded the alarm on a massive credit crisis... one that almost nobody is paying attention to.

More than $50 trillion on Wall Street will be affected. Hundreds of stocks are in danger – even household names you know and love (and might be holding in your portfolio).

But while investors punish the stock market indiscriminately, they'll also run from perfectly safe, high-yield bonds... And we'll be ready to take advantage.

We explain it all in our new monthly advisory, Credit Cashflow Investor. We'll hunt for countless buying opportunities in the bond market... ones that could lead to triple-digit gains while stocks get hammered.

To learn more – and to claim a full year of this research for 50% off – click here.