Editor's note: Here at Empire Financial Daily today, technical trading expert Greg Diamond from our corporate affiliate Stansberry Research is back...
As regular readers know, Greg recently shared a big prediction about a "historic turning point" in the markets that he sees on the horizon. As such, we're featuring more insights from Greg this week – including today's essay about why investors should continue to expect a high interest rate environment...
Nearly everyone knows what's happening now...
Inflation remains near 40-year highs and the U.S. Federal Reserve – along with many other central banks around the world – is raising interest rates in the attempt to quell rising prices.
This has led to tighter financial conditions, which have generated incredible volatility in global stock markets... and also fueled a bear market.
Considering the Fed's insistence on continuing rate hikes, I want to discuss just how high those rates can go.
And of course, I'm going to look at this from a technical perspective. That's a lot more productive than guessing when or if inflation will cool off... or what the central bank might or might not do going forward.
Simply put, I'll show you why interest rates can keep rising, and why investors should get used to higher rates for the near term...
I've written about the overwhelmingly simple concept of "following the trend" for the past few years.
The popular saying is, "The trend is your friend, until the end." If you have the discipline to follow the trend, it can keep you out of trouble when investing and trading, no matter what market you choose.
So let's take a look at the long-term trends in interest rates...
Here's a chart of the U.S. 10-year interest rate going back to the late 1970s. (Each vertical bar represents one month of price action.)
From the top left of the chart, we can see how interest rates started tanking once former Fed Chair Paul Volcker took on inflation. The two red arcs mark the high and the key lower high that set in motion the long-term downtrend.
You can see how well this market trended, based on the black dashed lines. Interest rates were suppressed for nearly 40 years.
That's a remarkable trend.
We can also observe a big recent shift on the right side of the chart. Most important, the black dashed lines that have held this downtrend have been broken.
That likely signals a new uptrend.
This is important because it marks, from a technical perspective, a new era of higher interest rates.
Even with the Fed poised to slow down the pace of rate hikes, we're still living in a new era of higher interest rates based on the simple rules of technical analysis.
How long can this last?
Well, longer than you think.
After all, overcoming multidecade-high inflation is a massive undertaking.
I'll be following the chart above in the years ahead. It will be a road map (along with other charts) to gauge when and where inflection points emerge for interest rate trends...
Together, they will help us navigate, and profit from, the markets.
Now, you may be wondering... if interest rates are set to rise out of a 40-year bear market, does that mean stocks will remain in a 40-year bear market?
Eventually, stocks will start to discount a higher interest rate environment. We'll see extreme pessimism and positioning in stocks, and that will lead to higher stock prices.
This is no different than any other transition from bear market to bull market throughout history... We just need to keep an eye on the timing of the transition. And that's easier said than done.
In the short term, higher rates are here to stay. And that means we should expect more volatility in the stock market.
But that doesn't mean you can't profit in today's market.
To do that, many investors simply need to accept this ongoing chaos... and leverage the principles of technical analysis.
January 17, 2023
Editor's note: According to Greg, we could be approaching a breaking point in the markets. This could be a generational moneymaking opportunity for investors who know what's coming... while folks who aren't prepared could be left behind. In a special presentation, he shares the full story – including how you can potentially double your money multiple different times this year as it all unfolds. Watch it here.