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The Federal Reserve is almost certain to raise interest rates next week during its June FOMC meeting, and investors are wondering if a stock market crash could follow. While it's impossible to exactly predict when the next stock market crash will occur, it's always prudent to have a plan to protect your portfolio.
In just a minute, we'll show you exactly how to protect your money from a stock market crash. Before we get to that, here's why investors are worried ahead of the June FOMC meeting.
According to the CME FedWatch Tool, there's a 98.1% probability of a rate hike at the FOMC meeting next week (Wednesday, June 14).
Past rate hikes have been associated with major market corrections. Wall Street traders don't like the uncertainty interest rate changes bring. The Dow fell by nearly 7% between when the Fed hiked rates on Dec. 16, 2015, and Jan. 15, 2016.
There's an even bigger reason why investors are concerned an interest rate hike could lead to a stock market crash in 2017, and while a crash might not be very likely right now, it's still important to prepare...
Why Higher Interest Rates Are Causing Stock Market Crash Concerns
One of the primary drivers of the current bull market that started in March 2009 - the longest bull market ever - was low interest rates.
The Fed slashed interest rates from over 5% in 2006 to 0.25% in 2008 to combat the effects of the financial crisis of 2008. The idea was to make borrowing money easier, so that businesses would be willing to borrow money to stay afloat or expand. This would help grow the economy out of the Great Recession.
But what happened instead was businesses used the cheap money to repurchase shares of their own stock and boost share prices. Between 2010 and 2016, publicly traded companies borrowed $1.9 trillion while they repurchased over $2 trillion worth of their own stock.
Nearly $2 trillion going into stocks is one reason why the Dow rose 91% between January 2010 and December 2016, while corporate profits only rose 20% by comparison.
But average investors have taken advantage of low interest rates to buy stocks, too. The Wall Street Journal reported just last week (June 1) that margin debt - loans customers took out from their brokerage accounts - hit their all-time high of $549.2 billion in April. Margin debt is typically used to buy more stocks, according to the same WSJ report.
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In short, cheap borrowing costs, a result of low interest rates, have helped boost stock prices. Stock markets are at or near record highs, and they've raced to these all-time highs at record pace.
The Dow closed at its all-time high of 21,195 just last week (Friday, June 2). Since Election Day, the Dow is up 16% from 18,259 and jumped between the 20,000 and 21,000 levels in its fastest 1,000-point run ever.
Since low interest rates have helped boost stock prices to these heights, another interest rate hike could lead to a market crash in 2017. Again, it's impossible to time or predict a stock market crash, but the combination of soaring highs and a major event that injects uncertainty into the economy could start a major sell-off. Wall Street traders may sell, assuming that low interest rates won't be able to help stock prices anymore, and that could start a domino effect as other traders try to get out too.
But even if it leads to another market correction, the combination of high margin debt and soaring stock prices could cause investors to panic and flee stocks. Because loans used to buy stocks can't be repaid if stock prices fall too far, margin traders are vulnerable to shifts in stock prices. That makes a 2017 stock market crash a possibility.
But that doesn't mean investors should panic; it just means they should remain vigilant. Here's how to protect your money from a stock market crash...
Our 2017 Stock Market Crash Protection Guide
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Money Morning Chief Investment Strategist Keith Fitz-Gerald says investors could make a mistake by following the herd and fleeing stocks.
Investors who try to time the market and sell before a crash need a lot of luck on their side. Think of all the profits you would have left on the table if you sold after Election Day, when Nasdaq futures fell 5% ahead of the open. The Nasdaq is up 22% since then. What's worse, investors will have an even tougher time knowing when to jump back in after a crash or major correction.
But investors who own well-managed companies in the right sectors will not just weather the storm, they'll profit when the recovery begins.
The trick to making huge profits is to find "must-have" companies that fall into what Fitz-Gerald calls the six "Unstoppable Trends": medicine, technology, demographics, scarcity and allocation, energy, and war, terrorism and ugliness (also known as defense). The Unstoppable Trends are backed by trillions of dollars that Washington cannot derail, the Fed cannot meddle with, and Wall Street cannot hijack.
One of Fitz-Gerald's top 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 continue to excel over the long term.
Raytheon has billion-dollar contracts with the U.S. government, but it also 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 downturn, RTN still has plenty of other customers to help it weather the storm.
But RTN's real allure as an Unstoppable Trend pick is that war and ugliness are realities of the world. For instance, the United States just made a $110 billion deal to allow Saudi Arabia to purchase weapons from U.S. companies, and Raytheon is a benefactor.
RTN currently trades at $160.73 a share and pays a 1.98% dividend yield.
Microsoft Corp. (Nasdaq: MSFT) is another leading company in the Unstoppable Trend of technology.
The reality is that technology is here to stay, and individuals and businesses across the world rely on it to function. Microsoft is a well-managed company and is a leader in the tech industry. That means MSFT will bounce back after a downturn.
Microsoft is also constantly innovating to stay on top of the tech 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 a Service." So even if the market dives, Microsoft services are still going to be in demand. Its Azure cloud computing service is now the second-largest cloud service in the world.
MSFT trades at $72.16 a share and pays a 2.16% dividend yield.
Becton, Dickinson and Co. (NYSE: BDX) is an example of a play in the Unstoppable Trend of demographics.
BDX is a healthcare company specializing in one-time use medical products used in hospitals and long-term care facilities. That means as populations age, more people will need this type of medical care, and BDX will be in even more demand. People will need healthcare whether the market falls 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.
BDX trades at $192.59 and pays a 1.52% dividend yield.
Even though stock market crashes can lead to losses in the short term, investing in strong companies in Unstoppable Trends will protect your money in the end.
Editor's Note: "Must-have" companies backed by Unstoppable Trends are a cornerstone of Keith's wealth-building strategy. But there's another type of investment he wants Money Morning Members to know about. It's one of his favorites, a kind of "desert island fund" he'd buy if he had to park his money in one place, "retire" from civilization for 20 years, and come back to a pile of money. Click here to learn more...