The End of the Gold Rally?

I believe that the correction that knocked 2,000 points off the Dow Industrials was orchestrated by the Fed. You can find details of my thoughts here and here.

Fed Chief Yellen has said a number of times that stocks were expensive. But last week, one of Yellen’s cohorts at the Fed openly admitted the sell-off was the Fed’s fault. To explain, I’m going to share with you the message I sent to my Wealth Advisory subscribers last Thursday…

On February 25: This morning on CNBC, St. Louis Fed President James Bullard said that the Fed deserved some blame for the ongoing stock market sell-off. I agree. But this admission wasn’t quite the mea culpa we might have hoped for…

Bullard went on to say that it was the rate hike campaign from 2004–06 that has investors all worked up. The fear is, as Bullard puts it, that the current Fed has started on a similar rate hike campaign. Well, maybe that’s the problem, but I don’t think so.

A couple times now, Fed Chief Yellen has said stock prices are too high. Back in May of 2015 she said the stock valuations were “generally quite high” and that “there are potential dangers there.” And in her recent testimony before Congress she said that the recent sell-off had brought valuations “more in line” with historical norms.

We simply can’t separate these comments from her actions. She’s halted QE purchases, lowered the Fed balance sheet by ~$380 billion, hiked rates once, and continues to say that more rate hikes are coming. Yes, she has indicated that she’s not trying to push rates back to 3–4%. But that message is getting lost, and it may not matter anyway. 

It’s one of the worst kept secrets in finance: the Fed absolutely targets stock prices. Usually, it wants stock prices higher, because of the wealth effect higher stock prices create. 55% of Americans own stock, and higher stock prices are good for them. 

But every once in a while, the Fed thinks stock prices get to high. There was Greenspan’s “irrational exuberance” and Yellen’s latest comments…

Now, I agree that the Fed should be mindful of stock prices. But to me that would mean hiking rates before valuations/wealth effects got out of hand. In other words, Greenspan left rates too low for too long. The housing bubble was well underway when he started his gradual hike in 2004. And Bernanke did the same thing, leaving rates at emergency levels (i.e., zero) for too long. 

I still think Yellen should have specifically said something like, “Rates have been at zero for too long, and it’s time to move them to 1%. It’s not time for a prolonged rate hike campaign.”

I don’t know for sure that would have moderated the declines. But investors might’ve been a bit less jumpy.

The Biggest Hit

I’ve talked a bit about the weird dichotomy between the health of the U.S. consumer and the weakness in the industrial sector. The big takeaway is that the consumer is a more important indicator than manufacturing. And at some point, the consumer will become the antidote to the recession talk that weak manufacturing data is encouraging.

What does this mean, exactly?

Well, it means that we should focus on stocks that will benefit from long-term consumer trends and have also been beaten up by recession fears. 

The poster child for this is Bank of America (NYSE: BAC). 

I know you’re probably tired of hearing me rant about BofA. But I am going to pound the table about its valuation and its future again…

So I ask: Will deposits continue to grow at BofA? Has the bank cut its risk profile? Is the dividend too low? Will BofA be positioned to benefit from a growing U.S. population and increased demand for housing? Will the bank make more money as interest rates normalize? 

The answer to all of these questions is an emphatic “Yes.”

Last time I wrote to you about Bank of America, I told you to have the stock on your radar, but there’s probably no need to run out and buy it immediately.

Well, I don’t feel that way anymore. I think you should buy it — or add to your position — right away. I get the sense that the whole Fed/recession fear thing has just about run its course. And that means Bank of America is close to making a solid 30–40% run higher. 

So buy it today. Buy it right out of the gate this morning. It’s the right thing to do.

Bank of America shares opened on February 25 at $12.10, just as my Wealth Advisory readers were getting the note I just shared with you. Today, BofA shares are well over $13, and they are very likely to be even higher in the days and weeks to come.

Why am I telling you that Wealth Advisory subscribers are already up around 10% on the Bank of America shares they were buying last Thursday morning? Because I want you to join The Wealth Advisory. It’s just $49 bucks a year, and there’s a six-month money-back guarantee.

I’ll also continue to share my best strategic ideas and insights here in Wealth Daily. (And speaking of those ideas, the gold stock I recommended here on Feb 3, Seabridge Gold (NYSE: SA), is up around 35%. You should take that gain now — gold is likely to head lower as stocks rally.)

But if you want to get all of my specific stock recommendations, you have to get The Wealth Advisory. You can sign up right here. It will be worth your while, I promise.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.