The Fed Says The Party Can Continue — And I’m Taking Advantage…
When last week kicked off, it looked as if the pullback we were experiencing the week before was going to continue.
From high to low, the S&P 500 dropped a little more than 5%. But this decline may have set up the next leg of the bull market.
The Federal Reserve seems prepared to support that bull. The Fed met last week and issued a bullish statement after the meeting. The statement opened the door to the possibility that tapering could begin after the next meeting in November. The Fed also reaffirmed the possibility that interest rates could be increased next year.
There were no surprises for traders, and the market reacted bullishly. After Wednesday’s rally, the SPDR S&P 500 ETF (NYSE: SPY) is back to trading above its 50-day moving average.
The Fed seemed to be realistic in its statement. Officials updated their economic projections. They lowered GDP forecasts for this year to 5.9% from 7%. The slower pace is in line with recent economic data. They increased expected inflation to 4.2% from 2.1%. That is closer to the experience of consumers.
For next year, they see slightly stronger economic growth (3.8% GDP growth instead of 3.3%) and inflation of 2.2%, up 0.1% from earlier forecasts. Half of the Fed members now expect one or two interest rate hikes next year.
Traders seem to like the news that rates will remain low and monetary policy will remain relatively easy for the foreseeable future. There are risks of inflation, but there is also a strong likelihood of continued economic growth and a bull market in stocks as the Fed creates trillions of dollars over the next year that end up in the stock market.
How I’m Trading Now
This is good news for investors, of course. But I’m remaining cautiously optimistic and will remain committed to strategies that allow me and my readers to adapt to any market environment.
That means right now, I’m looking for picks that benefit from economic growth and continued strength in stocks. I’m also looking for trades that can deliver immediate income.
One of those picks is the department store chain Macy’s, Inc. (NYSE: M).
This is a stock with a 0.7% dividend yield but an extraordinary potential return for an income trade, as I’ll explain in a moment.
I believe Macy’s is undervalued with a price-to-earnings (P/E) ratio of about 6 based on this year’s expected earnings. Its reported price-to-book (P/B) value of 2.2 is higher than it should be based on the fact that much of the company’s assets include prime real estate in some of the most valuable retail districts in the world.
Based on some of its recent sales, Macy’s real estate portfolio is likely worth more than $15 billion. That’s more than twice the company’s current value and would mean the correct P/B ratio is under 1, indicating deep value.
This is a long-term opportunity that should be enticing to traditional value investors. If we see another rotation into value stocks, that could push shares higher. But in the meantime, it also adds a margin of safety.
That’s good, but what really excites me about the stock is how we can use it to make a short-term trade to benefit from recent market volatility.
You see, right now, there’s a chance for us to own shares of M — while still being able to generate income that’s far and away beyond the stock’s meager 0.7% yield.
In fact, based on the details of the trade I recently sent to my Maximum Income readers, we can make about 6.3% in income from the stock — in 57 days or less.
By trading this way, we’re essentially getting paid to wait for the rest of the market to realize M’s hidden value. And until that happens, we can make another trade like this, again and again…
What’s more, if investors do see the hidden value in M and send the stock higher, we’ll make a quick gain of about 11% in roughly the same time.
And it’s all thanks to a “loophole” that most investors don’t even know exists.
Most Americans have absolutely no idea about this simple strategy… But it has the power to protect your portfolio on the downside, while supercharging your income as well. And once you know how it works, you can make trades like this in as little as six minutes…