Early this morning, to the surprise of absolutely no-one, the US Federal Reserve lifted interest rates by a quarter of one percent.
More surprising, especially for the doomsayers, was that the Fed remains dovish, with chair Janet Yellen saying "We expect policy to remain accommodative now for some time."
How accommodative? Try interest rates at around 2% by the end of 2018 and just 3% by the end of 2019.
In other words, expect low US interest rates for a few more years to come yet.
No wonder Wall Street took off, the Dow jumping over 100 points and the Nasdaq hitting yet another all-time high… and that was before the share price of tech giant Oracle jumped 5% higher in after hours trading after profits came in ahead of expectations.
No wonder also the US dollar fell, sending the Aussie dollar back above US77 cents.
That said, for me, the only way from here for the Aussie is down… something that will make buying US stocks NOW an attractive proposition.
(As an aside, and in what could be a case of perfect timing, our own Scott Phillips is today naming his top US stock pick to buy now, exclusively to members of his Motley Fool Share Advisor stock picking service. Click here to give the service a test run.)
My bet is the Reserve Bank of Australia (RBA) raises interest rates at a much slower pace than the US, because doing otherwise would burst this almighty Sydney and Melbourne housing bubble.
Australian households have got far too much debt to sustain any sort of significant increase in interest rates.
It's why, as quoted in the AFR, James McIntyre, head of economic research at Macquarie Bank, says he's not expecting the RBA to increase interest rates until early 2019.
Not to mention the Australian unemployment rate, which has just jumped to a 13-month high of 5.9%. It's hardly the sort of read that will have the RBA reaching for its cash rate gun any time soon.
By comparison, the US unemployment rate is just 4.7%.
However it all shakes out, two things seem certain…
1) The Aussie dollar will trade lower than its current US77 cents, over time.
2) Interest rates, and therefore term deposits, are unlikely to rise significantly from here, potentially staying below 3% way out until beyond 2020.
For financial markets, which jolt, jerk and react violently on a daily change in the iron ore, gold or oil price, low interest rates all the way out to 2020 is like a kid playing in a candy store.
Signal #1 for rising stock markets.
For investors sitting in cash — earning a pittance of a return now, a situation likely to persist for at least the next 5 years — they have little option but to turn to the stock market not only searching for capital gains, but also for dividend income.
Signal #2 for rising stock markets.
By comparison to term deposits, dividend yields remain very attractive, more so when you add in franking credits.
Signal #3 for rising stock markets.
The elephants in the room remain Trump and volatility.
The former is a loose canon… hopefully more loose than canon. And politically, just like Malcolm Turnbull, Trump will find it difficult to pass all his proposed policies into law.
In other words, when it comes to playing Trump, I'd suggest playing the markets and not the man.
And that means playing in a growing, recovering, prospering US and global economy, all happening at a time when interest rates remain at historically low levels.
For equity markets, it doesn't get any better… something reflected in the 106 day period during which neither the S&P 500 Index or the Dow Jones Industrial Average have failed to produce a decline of at least 1%.
Volatility is through the floor, and when added to stretched valuations, this leads many to think a stock market correction must be just around the corner.
Maybe. They happen.
But probably not.
Valuations alone don't crash share markets. Nor do winning streaks.
Rising interest rates can crash markets, but not when we've got visibility into where they are headed, and when.
Recessions can crash markets, but the US is about as far away from a recession than politicians are from reality, and here in Australia, we've gone 25 years without a recession so far, and counting.
Sure. You can believe the doomsayers and pessimists. A housing crash. The end of Australia. China's corporate debt explosion. Trump bombing North Korea. More European countries deserting the EU. Scottish independence. And surely we're overdue another Greek crisis.
Go ahead. Keep some cash on the sidelines, especially if it helps you sleep better.
But don't just sit there and wait for a stock market crash that may never come. Especially when fully franked dividend yields of 5% or more are staring you in the face.
Invoking the recent the words of Warren Buffett…
"… the best thing with stocks actually is to buy them consistently over time."
Wise words from an 86 year old self-made billionaire who has seen everything the market can throw at one person.
