Stocks have been hitting all-time highs this week, but with the Fed expected to raise interest rates, many are wondering if the stock market will crash after the FOMC meeting in December.
No one can forecast the exact timing of a stock market crash, but the last time the Fed raised rates, on Dec. 15, 2015, the markets dropped by 8% over the next month.
Now that the stock market has been breaking record highs - the Dow passed 19,000 points for the first time ever this week (Tuesday, Nov. 22) - an interest rate hike at the FOMC meeting could lead to a more drastic pullback than last year's. It could even trigger a market crash.
It's always wise to have a stock market crash protection plan ready to go, but with the FOMC meeting next month, it's a great time to create your plan.
Today we'll show you how to protect your money if there is a stock market crash - and why thanks to the Fed, one might come soon...
Why There Might Be a Stock Market Crash After the FOMC Meeting
There are three big reasons why this December FOMC meeting could lead to a stock market crash.
First, low interest rates have helped drive stock market gains, and raising them could lead to a pullback in stocks.
Near-zero interest rates led to investors shying away from the bond markets. When interest rates are too low, investors can't make any money holding bonds. Instead, more money has been going into stocks that wouldn't have been if rates were higher. That's about to change.
Don't Miss: Check out what's next for the price of silver...
Second, higher interest rates means borrowing money is going to be more expensive.
Businesses may not be able to fund expansion or be able to continue the practice of purchasing their own shares to bolster their stock price. If more expensive borrowing means businesses might contract, their stock prices may tumble as well.
Third, the stock market is currently overvalued, and that's not sustainable...
A financial crash is often the result of a market bubble. For stocks, this means their prices far exceed their true value. Eventually the prices get too high and the bubble bursts.
That's what happened when the stock market crashed in 1929. Robust manufacturing in the United States had everyone believing they could win in the stock market as the 1920s roared. Extraordinary numbers of people had borrowed to invest in the market, believing it would only go up more. This speculative investing created a stock market bubble.
On Oct. 29, 1929, now known as Black Tuesday, the stock bubble burst and investors panicked. Investors began selling, hoping to get back some of their money, which led to prices sinking lower. The U.S. stock market surrendered 90% of its value between 1929 and the early 1930s.
A bubble also existed before the 2008 stock market crash. This time the bubble was in the real estate market. Home prices had been steadily rising, in part because lenders relaxed standards, granting subprime loans to borrowers who couldn't afford houses. The loans worked as long as house prices kept rising, but once prices fell, the bubble burst.
The collapse of the housing market led to a stock market crash in 2008 as many investments were tied up in housing prices, like mortgage-backed securities.
With the current stock market hitting record highs and showing signs of being in a bubble, the FOMC will meet to decide on raising interest rates...
Will the FOMC Raise Rates in December?
The FOMC is expected to raise interest rates at the December meeting, and there are three factors that explain why.
First, the Fed has been debating an interest rate hike for the last year and its next meeting on Dec. 13-14 is its last opportunity to raise rates this year.
The FOMC meets periodically to discuss the U.S. economy. The Fed uses its power to move interest rates up or down to influence the strength of the economy. If it thinks the economy is weak or sluggish, it lowers rates to stimulate the economy. If the economy is overheating, it raises rates to encourage saving.
The problem now is interest rates have remained below 1% since 2008. This means the Fed needs to raise rates so it can have a tool to combat a weak economy (rates can't go any lower).
Second, the Fed itself believes the economy is ready for a rate hike.
Fed Vice Chair Stanley Fischer has said the case for higher interest rates is "quite strong," and he used his speech at the Economic Club of New York on Oct. 17 to argue against keeping rates too low.
More recently, on Thursday, Nov. 17, Fed Chair Janet Yellen said, "I expect economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions." This means higher interest rates "could well become appropriate relatively soon."
Third, the market is also expecting a rate hike. According to the CME FedWatch Tool, there is a 93.5% probability the Fed will raise rates by 25 basis points at the December meeting.
After the FOMC declined to raise interest rates during its last meeting, which took place right before the U.S. presidential election, the Dec. 13-14 meeting is expected to be the meeting where rates are raised.
We've seen signs we are in a stock market bubble, and we know the Fed is set to raise interest rates in December. Experienced investors know they need a stock market crash protection plan. Here's our plan that can help protect your money during a stock market crash...
How to Protect Your Money During a Stock Market Crash
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Our stock market crash strategy has three components.
First, buy gold for stability.
Michael Lewitt, Money Morning's Global Credit Strategist, recommends investors keep between 10% and 20% of their total portfolio in gold. Gold is a safe haven in times of market tumult and also has the potential for price appreciation.
Gold can be most easily purchased through gold ETFs. The SPDR Gold Trust (NYSE Arca: GLD) is one such ETF. GLD currently trades at $115.42 and has risen more than 13% so far in 2016.
Second, if you want to make money as the market crashes, you can short the broad stock market indexes.
Money Morning Capital Wave Strategist Shah Gilani has one way to short a dropping market. Investors can purchase ProShares Short S&P 500 (NYSE Arca: SH) to short the S&P 500. When the S&P 500 falls, shares of SH go up.
This is not a buy-and-hold investment. Should the S&P 500 climb, the price of SH will fall. SH should only be purchased directly before a stock market crash.
Third, buy stocks in well-managed companies in must-have industries.
Money Morning Chief Investment Strategist Keith Fitz-Gerald recommends three stocks that meet these requirements. All make products that their buyers must have whether the economy is doing well or not and pay some of the best dividends on the market.
The first is Raytheon Co. (NYSE: RTN). The need for cybersecurity certainly isn't going away. RTN has a billion-dollar contract with the Defense Department to help bolster cybersecurity. It also has a number of contracts for conventional weapons systems. The United States will need to be secure no matter what, and Raytheon provides key products for security.
The second is Becton Dickinson and Co. (NYSE: BDX). BDX manufactures and markets single-use medical supplies. Consumers need medical care no matter what the economy and the political leadership does. Because BDX's supplies are single-use, providers constantly need more of them.
The third is American Water Works Co. Inc. (NYSE: AWK). Water is an eternal human need and AWK is a public utility that supplies water and water supplies across North America.
So, whether there's a stock market crash after the FOMC meeting or not, or a stock market crash at some other time, your portfolio is protected.
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