Will the Stock Market Crash After the FOMC Meeting?

Investors are wondering if another interest rate hike in March will cause the next stock market crash.

That's because the stock market has been soaring, and the U.S. Federal Reserve hiking rates could throw water on red-hot stocks.

Just last week (Monday, Feb. 27), the Dow hit a new record closing at all-time highs 12 days in a row as the Trump rally kicked into high gear. And that's just the latest in an eight-year bull market run that started all the way back in March 2009. During the current bull run, the Dow is up 215% since bottoming out in 2009.

But now the Fed is ready to raise rates again. In fact, the Fed is all but guaranteed to hike rates during the FOMC meeting next Wednesday (March 15). The CME FedWatch Tool shows an 88.6% probability of a rate hike next week.

probability-of-a-rate-hike

But will the stock market crash next week?

It's impossible to make an accurate stock market crash prediction. But we know low interest rates have helped artificially inflate stocks to these flashy highs, and the era of low interest rates is ending...

Why Hiking Rates Can Cause a Stock Market Crash

Hiking interest rates could cause a stock market crash in 2017 thanks to an overinflated stock market.

Low interest rates have pushed money into the stock market and driven up stock prices to unsustainable levels.

The Fed slashed interest rates during the 2008 financial crisis. Interest rates were above 5% before the recession, but by the end of 2008 the Fed cut rates to 0.25%. The idea was to stimulate the economy to combat the recession.

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By making it cheap to borrow money, the Fed reasoned, corporations would be willing to borrow and spend on new projects or expanding their business. This would boost the economy and end the economic downturn.

But corporations took advantage of the cheap borrowing costs to buy shares of their own stock. Since 2008, publicly traded companies have borrowed $1.9 trillion and have spent over $2 trillion buying back shares of their own stock.

That means the Fed's loose monetary policy has encouraged companies to pile borrowed money into stocks.

Bond investors have also been forced into buying stocks.

When the Fed slashed rates in 2008, newly issued bonds also paid miniscule rates of return. Investors relying on income from bonds had to turn to stocks to make money.

That's important because the bond money flowing into stocks artificially drove up prices. If interest rates were higher, then less money would have entered stocks and prices would be lower.

And we aren't just assuming stocks are overvalued.

We can look at one of the most famous measures of stock market value in the Shiller PE ratio. Right now, the Shiller PE ratio is 74% higher than its historic average.

That's a big deal. At 29.11, the Shiller PE ratio is now higher than it was before the 2008 stock market crash when it got up to 27.4. The only time it's been higher was during the tech bubble in 1999, when it ballooned to 44.2.

And corporate profits are not growing enough to justify the explosion in stock prices. In 2016, earnings per share of the S&P 500 grew by a modest 3.07%. But the overall S&P 500 soared 17.45%.

Now with stock markets near all-time highs on the back of low interest rates, the Fed is planning to hike rates again. And that could send stocks tumbling down.

"But the risk always is interest rates go up, and that brings stocks down," Warren Buffett told CNBC just last week (Feb. 27).

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Buffett might not be predicting a stock market crash, but the risk is there. With stocks overvalued, nervous investors might lead a sell-off that could spiral into a financial crisis.

But now is not the time to panic. Instead, smart investors can start preparing for a potential stock market crash.

That's also why we've developed a plan to help you protect your money if the market crashes. And followers of our stock market protection plan could book up to triple-digit gains if the market crashes again...

Here's How to Protect Your Money from a Stock Market Crash

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Money Morning Chief Investment Strategist Keith Fitz-Gerald knows the markets are always going to rise and fall. And investors could make a mistake by fleeing stocks when prices get too high.

Investors who try to time the market and sell off before a crash need a lot of luck on their side. And chances are they'll never know the right time to buy back in. At the end of the day, fleeing stocks for cash could just end up leaving money on the table.

But investors who buy solid stocks and weather the storm will be handsomely rewarded.

That's why Fitz-Gerald says to invest in stocks in the "Unstoppable Trends."

Fitz-Gerald's "Unstoppable Trends" are industries that will be in demand no matter what the markets are doing. These are health, war, demographics, scarcity, technology, and energy. That means even if the market crashes, the companies in these industries are still going to be in demand and will continue to grow.

One of Fitz-Gerald's favorite stocks from the "Unstoppable Trend" of war is Raytheon Co. (NYSE: RTN).

Raytheon is a leader in the defense industry with billions in contracts with the U.S. government and countries across the world. That means if the market falls, Raytheon is going to bounce back.

And even as Raytheon signs billion-dollar contracts with the United States, it has a diverse customer base. International customers make up just under half of its business. That means even if a few countries cut defense spending during an economic collapse, RTN still has plenty of other customers to help it weather the storm.

The stock might dip during a crash, but it's going to come roaring back. And you'd be better off owning it than sitting on your money.

Microsoft Corp. (Nasdaq: MSFT) is another leading company in an "Unstoppable Trend," this time in technology. There are plenty of fads in the tech industry, but the reality is the world can't function without it any longer. And Microsoft is a long-term player that isn't going away.

In fact, Microsoft is one of the top cloud service providers in the world. Businesses and individual consumers are increasingly relying on cloud storage to manage their daily lives. And Microsoft's new Azure cloud platform is poised to fend off its rivals by integrating Microsoft software, something CEO Satya Nadella calls "software as service." So even if the market dives, Microsoft services are still going to be in demand.

Becton Dickinson and Co. (NYSE: BDX) is an example of a play in the "Unstoppable Trend" of demographics. It's a healthcare company specializing in one-time use medical products largely used in hospitals and long-term care facilities. That means as populations age, BDX will be in even more demand. People will need healthcare whether the stock market crashes or not.

But BDX is also an exceptionally well-managed company. It has a 10.54% profit margin and maintains a 1.58% dividend yield, even after a $12.2 billion takeover of CareFusion two years ago. That means the company's capital management is sustainable and will easily survive a market downturn. And that's good news for its shareholders during a stock market crash.

Even though stock market crashes can lead to short-term losses, investing in strong companies in "Unstoppable Trends" will protect your money in the end.

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