I warned you over a month ago that The Great Income Heist was coming, and things have changed dramatically this week.
If you have money sitting in cash or an equivalent account, consider this week the “stick ‘em up.” The heist is about to follow, so you should start thinking about your escape.
I’ve talked for more than a year about the massive amount of cash investors have stowed away in money market accounts. It was around $5.3 trillion in May 2023 when I first wrote to you about it here in Power Trends. And that cash bubble has continued to swell – now at $6.4 trillion, the most ever by far.
Money market accounts have been a decent place to invest for safety and return, with interest rates higher than they have been in 18 years. Many funds yield about 5% right now, which is in line with the Federal Funds rate.
But that Federal Funds rate is about drop… and so is the yield on your cash.
We’ve known rates would come down at some point. They had to after the Federal Reserve raised rates the fastest in 40 years – 11 increases that raised rates five percentage points in a little over a year.
Inflation has fallen dramatically, and the Fed has held rates steady for one year. The market always looks forward, and investors have been eyeing the time when rates start to fall.
The timing has always been a little uncertain, but this week’s developments all but set it in stone. In its latest policy meeting, the Fed acknowledged that a rate cut was possible in September. That started to solidify the timing, but weaker-than-expected economic data sealed the deal.
On Thursday, the latest manufacturing data showed a contraction in that industry. And yesterday, the monthly jobs report revealed fewer jobs were created than expected and the unemployment rate increased to 4.3% – the highest in nearly three years.
That both increased and decreased uncertainty, which investors hate. On the one hand, we heard talk of the dreaded “R” word again – fears of a possible recession. It’s way too early to go there, and the data doesn’t support it at the moment. But investors often overreact because they don’t want to be surprised.
On the other hand, the weaker economy lifted the odds of a rate cut next month to 100%, according to CME Group’s FedWatch tool (which bases the probability on Fed Funds futures contracts).
The question now is not whether the Fed will cut rates but by how much.
It’s astonishing how much the data flipped. On Thursday, the probability of a 25 basis point cut stood at 78%, with a 22% of a 50 basis point cut. By yesterday, that did a complete reversal – a 79.5% chance of a half-point cut with a 20.5% chance of a quarter-point cut.
Source: CME Group
There’s The Great Income Heist right there. Rates are coming down and with them the solid yield many have enjoyed while sitting in cash.
If the Fed shot big and lowered rates by half a percentage point, the return on that cash almost certainly dips from 5% to 4.5%. That’s a 10% pay cut… with an even larger cut likely in the months to follow.
I don’t think any of us would be satisfied with a 10% pay cut, so what do you think happens next?
A massive chunk of that $6.3 trillion in money market funds will rotate back into stocks in search of better returns.
That’s bullish for the entire market, and the timing could line up almost perfectly with Big Money’s typical election-year pattern of pouring money back into stocks as the election gets closer – and even more so after the election.
It means the highest-quality stocks in the market are best positioned to make the most money. These are the stocks that rank the highest in my Quantum Edge system with their strong fundamentals and technicals supported by Big Money inflows.
It means smaller stocks are likely to run higher, as we talked about on Thursday.
And it means that investors who seek income as part of their investing strategy will look for dividend-paying stocks. I saw more mention of that this week than I have in a long time.
Bank of America’s head of U.S. Equity and Quantitative Strategy (yay!) wrote this week, “Over $6 trillion sits in US money market funds as the Fed is poised to start cutting rates… Bond funds have seen record flows YTD, but we see more opportunities within equities for investors searching for yield.”
Couldn’t have said it better myself.
You Can Have Both Price Appreciation and Yield
My focus both personally and in my investing services is not primarily yield.
I seek substantial price appreciation first and foremost, relying on the highest-rated stocks in my Quantum Edge system. I can generally count on seven out of 10 stocks making money, and independent testing by TradeSmith showed these stocks outperformed the S&P 500 by 7-to-1 since 1990.
The good news is that you can often find these high-quality stocks that also pay solid dividend yields.
I fired up the Quantum Edge system and in just a few minutes found Janus Henderson Group (JHG), a highly rated stock that yields 4.2% and has a Quantum Score of 79.3, which is right in our sweet spot buy zone of 70 to 85.
Source: TradeSmith Finance
You may know the name. Janus Capital Group opened its first fund back in 1970, and it merged with London-based Henderson Group in 2017. Today it manages $361 billion in assets.
Financial stocks often don’t rate well in my system because they carry large debt, but Janus Henderson bucks the trend with debt at just 8.6% of equity. The fundamentals rate solid, and the technicals are exceptionally strong.
A lot of that is because of all those “green lights” below that show Big Money flowing in. Those green bars are Big Money buy signals picked up by my system using proprietary algorithms I designed after my years on a trading desk executing precisely these kinds of trades.
Source: MAPsignals.com
That’s 14 signals so far in 2024, including four in just the last week. The ability to “see” these money flows give us a huge advantage.
Rates are about to come down. The return on cash is about to fall. And stocks are the best game in town.
Talk soon,
Jason Bodner
Editor, Jason Bodner’s Power Trends
