How the Fed Could Cause a 2018 Stock Market Crash

2018 stock market crash could be imminent, and it could be the Fed's fault...

That might sound surprising considering the Dow is up over 250% since the rally began, back in March 2009, and is up over 21% this year alone.

But Federal Reserve policies are changing, and that could cause a market crash in 2018...

Will There Be a 2018 Stock Market Crash?

stock market crash

No one can predict a stock market crash, and we certainly aren't going to try. But there are some market crash warning signs we want Money Morning readers to be aware of.

And they all involve the U.S. Federal Reserve...

You see, when the 2008 financial crisis hit, the Fed took action to help boost the economy by slashing interest rates all the way down to 0.25%, their lowest rates ever.

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The plan was to make it cheap and easy for companies to borrow money, which would help them grow even as the economy fell into a recession.

Instead, companies used the cheap borrowing costs to repurchase shares of their own stocks...

Between 2009 and 2016, publicly traded companies bought back $2.1 trillion in their own stock, while borrowing $1.9 trillion. That means historically low interest rates have helped boost stock prices during the bull market run.

And that's led to stocks reaching historically high valuations.

Right now, the Cyclically Adjusted Price/Earnings (CAPE) ratio, a reliable measure of valuation in stocks, shows that equities are trading 86.9% above their historical average.

In fact, the CAPE ratio has only soared higher twice: in 1929 and 1999. Both times the stock market crashed afterward.

Now, we aren't predicting a stock market crash will happen this time. But the impressive highs that stocks have reached since the bull market began, over eight years ago, may not be sustainable.

Especially as the Fed is quickly changing policy course...

How the Fed Could Cause a Stock Market Crash in 2018

The Fed is tightening monetary policy, and that could pull money out of the stock market.

Since December 2014, the Fed has hiked interest rates four times, sending the rate above 1% for the first time since 2008. Now, the Fed is planning four more rate hikes by the end of 2018, which will push the rate above 2% for the first time since 2008.

The low interest rate era is ending...

And there's more. The Fed is also unwinding its massive $4.5 trillion balance sheet...

You see, not only did the Fed slash interest rates after the 2008 crisis to stimulate the economy, it also began buying up assets from Wall Street to help push money into the markets.

The Fed is now ending its asset-buying program - also known as "quantitative easing" - and unloading the assets. That's going to pull even more money out of the markets.

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With stocks at historically high valuations, less liquidity could be the trigger that leads to a market correction, or even a crash, in 2018.

Again, markets could still run even higher. No one can predict a market crash. But we want investors to be fully informed about the risks.

And we want investors to know how to profit no matter what the market is doing.

That's why we're showing you two of the best stocks to own during a market downturn. Not only are these some of the best stocks you can own, but they have a proven track record of rising during a market crash...

2 Stocks to Protect Your Wealth During a Market Crash

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The two stocks we're recommending have a track record of performing even as the broader market declines. Both of these stocks brought positive returns during the tech crash in 2000, even as the overall markets fell more than 10%.

While there's no guarantee these stocks will be immune from the next correction or pullback, they are some of the best companies in the most in-demand industries.

Money Morning Chief Investment Strategist Keith Fitz-Gerald thinks investors should hold on to stocks in the "Unstoppable Trends." The trick to making huge profits is to find "must-have" companies that fall into these 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.

By owning well-run companies in these Unstoppable Trends, you'll own resilient stocks that will charge out of any market downturn, leaving behind anyone who sold off stocks for other assets. And if the market doesn't correct, these stocks are still going up.

That's why we're bringing you two of our favorite stocks from the Unstoppable Trends.

Raytheon Co. (NYSE: RTN) is our play for the trend of war, terrorism, and ugliness.

Raytheon is a leader in the defense industry, with billions in contracts with the U.S. government and other 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 the fact that war is a reality of the world. For instance, as tensions rise abroad, the United States is more likely to need more weapons and equipment. When the United States launched a missile strike on a Syrian airbase on April 7, Raytheon's stock jumped more than 2%, since its missiles were used.

RTN currently trades at $185.24 a share and pays a 1.72% dividend yield. RTN is up 30.45% this year.

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 utilized 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 higher 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 $224.23 and pays a 1.34% dividend yield. BDX is up 35.46% year to date.

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...

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