Hedge Yourself Before Everyone Else Does
It’s no secret that the stock market is basking in its glow of record highs and gleeful bliss. However, many overlook the fact that the reason the stock market has been doing so well is because there’s just no other worthwhile place to invest money.
Since the 2008 recession, interest rates have stayed near 0% for the longest time in history – BY FAR. Interest rates have a direct, negative correlation with stock prices: low rates equal high stock values, and vice-versa.
Interest rates also have a direct, negative correlation with inflation. Usually if the Federal Reserve maintains low interest rates for a period of time, inflation will rise, which in-turn causes the Fed to raise interest rates.
Over the past few years inflation has remained low, despite the near 0% interest rates. This is primarily due to the strengthening of the dollar vs. other currencies – namely the Chinese Yuan, British Pound, and Euro.
The U.S. stock market was fortunate enough that these currencies depreciated in value relative to the dollar. But like all things in an economy, the dollar value will eventually swing the other way, causing inflation to rise, and you guessed it… higher interest rates.
The Federal Reserve is not expected to increase rates until after the November election which means we may be in for some more record highs in the near future. However, the closer November nears, expect the stock market to begin falling as people unload their portfolio in an attempt to save their significant gains. Not to mention if the Fed’s hand is forced through unexpected inflation.
There are many overvalued companies ripe for Put options at the moment, including some ETFs specifically focused on a bearish market. Start hedging your portfolio soon before everyone else does.