If there was one question any investor would like the answer to it’s this: Where will the Federal Reserve finally land on interest rates?
Since February 2022, the U.S. central bank has been on a rate-hike tear, and now interest rates are settling around 5.25%. Not completely awful or economy-crushing, but also not ideal, especially compared to the near-zero environment following the COVID-19 crash in March 2020.
So you may be wondering: What do I do? How do I invest amid higher rates like this?
And that’s where Chief Investment Strategist Adam O’Dell and Chief Market Technician Mike Carr come in.
They sat down recently for a fireside chat, where they discussed the future of interest rates, dividend investing and why they are loving the community they’re building in their respective trade rooms.
Click here or on the button below to check out their conversation now.
If you’d like to jump to a particular subject, follow one of the time stamps below:
- Investing themes and dividend investing. [0:00]
- Where Treasury rates are headed next. [1:30]
- Why Mike and Adam started trade rooms. [4:12]
- Diversifying your strategies. [8:32]
You can also check out a full transcript below.
If you’re at all curious about what Mike or Adam expect for the market in the future, I encourage you to check this video out!
And if you haven’t had a chance to see the details of Mike’s brand-new Apex Alert, click here. We’re closing the door on this initial offer very soon, so take a moment to find out if Mike’s Apex Profit Calendar is a strategy you want to add to your arsenal.
What Investors Expect From Here
Adam: To shift gears a little bit, I know that you and I were talking this morning about a report that we saw out from Public.com, which is a somewhat new brokerage firm.
And they basically asked their client accounts what types of investing themes they were most interested in. And I know this shocked both you and I. Number one was dividend investing. And number two was investing in AI [artificial intelligence]. Couldn’t be more dissimilar. What’s your take on that?
Mike: That was the shock is the number one is ultra conservative and the number two is ultra aggressive. There is no medium.
And the individual investor, it’s the risk-on/risk-off idea. There are some who want to be ultimate risk-off. Others want to be ultimate risk-on until something else moves. So those dividend investors, when they see little losses, they’re going to jump into AI. And when the AI investors have losses, they’re going to say: “Oh, I was too aggressive. I want to be a dividend investor.”
It’s going to be a schizophrenic market now that the public is so large. And that’s why you have to be nimble. You have to be short term in this type of market … that the longest holding period is, as you know, forever. That’s absurd right now.
Adam: Sure. All right.
Mike: And it’s been absurd in the past, too. You know, there’s a study out that 60% of all publicly traded companies since 1926 failed to beat Treasury bills.
The Next Treasury Target
Adam: So it was a good segue. I was going to ask you what you think about Treasury rates right now. I mean, you can earn basically about — this will date us a little bit — but 5% on cash just about. And that’s insane.
I mean, my parents took out their first mortgage in 1982, shortly after I was born, at 17% or 18%. And then we saw the longest bull market and bond prices and the longest decline in interest rates.
You know, conversely, I got a mortgage in 2020 at 3%. So with rates going higher, I know that’s kind of caused a lot of shockwaves.
What’s your take on rates? Maybe if you have a thought on where they’re going next. And also, I’m more interested in knowing what’s your take on dividend-paying stocks versus bond instruments that pay equal rates?
Mike: I think you should always go with the fixed income if you’re just out there for income. The dividend investor faces the risk of a market downturn.
And let’s say you’re collecting 3%, and the market pushes your stock down 30%. That’s 10 years’ worth of dividends. I know it always comes back, but not always.
So I think you have to be selective there and not just, “I’m going to click this coupon forever on this stock.” You need to be more aggressive.
There’s a number that investors are just going to say, “I don’t need the stock market anymore.” Like you said, in 1982, you could have locked up a 30-year Treasury at 15%. You’d have beaten the stock market. Yet, it was available.
Mike: I don’t think we’re going to see 15%, but I also think that number is much lower now. I think if we were to get to 7%.
Adam: The enticing number. You think?
Mike: I think it’s 7%. Jamie Dimon came out, the CEO of JPMorgan, who said: “7%. The world’s not built for it.” So I think if we hit 7%, a lot of investors are going to say: “I’m happy with 7%. My money doubles every 10 years. My financial advisor tells me to expect 7% to 10% a year. It’s risk-free. I’m in.”
Adam: The baby boomers will feel like they’ve reached the finish line, and they’re going to want to get out and go to the beach and not worry about the stocks and…
Mike: Never look at the Dow again. Yeah.
Speaker 1: That’s an interesting take.
And I have a slightly different take on dividends. I’ve often said that with dividend-paying stocks, not only can you earn the yield, but you’re also positioned for capital appreciation. Certainly, in a bull market and in these companies, they fight through inflation and in the growth of their earnings and their business models can grow not only their earnings but their dividends. So you can see your dividend payout get larger relative to a bond which is fixed.
But I have to say a 5% on cash right now. It looks pretty good in the bond market.
Mike: Yeah, I think that a lot of investors are going to move more money to the bond market, and they probably should.
The Trade Room’s Role
Adam: So shifting gears a bit more, another thing that we both have adopted recently, and you were an early adopter that I kind of followed in on your slipstream, so to speak. But we have both opened trade rooms which are basically real-time open broadcasts where Mike and I speak to our subscribers, our readers, our followers — we actually share our screens.
So we have sophisticated trading software that does analysis that we share with our viewers on the screen.
We have a chat feature where we answer questions in real time, so there’s nothing to hide behind. And sometimes we’ll even turn our camera on so you can see our faces in our home offices.
So you’ve been in this many months longer than I have, but I saw that your success with it and everyone, how much they appreciated the access to you on that. So let’s tell folks at home a little bit about what you do in your trade room.
Mike: So within the trade room, we’re making short-term trades. We’re looking at trades that are closed in as little as a few minutes.
We had one Fed day. That day is the Federal Reserve announcement. They release an announcement at 2 p.m. and then the chair comes out to talk at 2:30 p.m. Eastern time.
We had one day with just four whipsaw trades that were all winners.
In a matter of moments, there was one. The shortest trade we’ve had is three minutes. So the rules are all set. That’s how we can do that. It says if SPY does this, get in… Get out when it does this.
Adam: Okay, so your subscribers aren’t waiting for an email to hit their inbox, right? They know ahead of time. If this happens, then Mike has told me I should take my profits, right?
Mike: Yeah. We get it all out there in that first hour of the day. So you have your trade plan all laid out by 10:30 a.m. Eastern. And then when those events happen, when the Fed comes out and speaks, you’re ready.
It doesn’t always work that way. On the last Fed day, we had two small gains, about 20% each.
Adam: Smaller 20% [ha, ha]!
Mike: So we were being…
Adam: Just being modest here, guys.
Mike: We were happy with our day, but it was nothing like the excitement we have when we have multiple trades hitting quickly one after another, must’ve took about 20 minutes each.
Yeah, we also do a little bit longer term with a three- to five-day hold. So they’re all price-driven strategies. It’s short-term… we can’t look at the fundamentals because they don’t matter over that time frame.
Yeah nobody’s really talking about earnings, but there are big moves, especially recently as more and more money is coming into the market. Robinhood, love him or hate him, has brought a lot of cash into the market.
Yeah, now there’s all these other brokers offering and Robinhood forced Schwab and TD to offer free commissions, so there’s a lot of benefits to all that. It’s created a lot of volatility but we have more opportunities and we just constantly look for them. We spend an hour running through different strategies, setting up our trade plan for the day, getting into trades. We also do some conservative stuff, but it’s very short term.
The Robinhood Effect
Adam: That’s great. And mentioning Robinhood, that’s another thing from that Public.com report that took me by surprise was this idea … So in the COVID days, in 2020 and early 2021, a lot of retail money flooded into the stock market. And that was thanks to kind of a convergence of Robinhood, making it very easy and blowing the confetti when you made trades and incentivizing. There’s also the stimulus checks … but folks were at home there, bored, maybe had a gambling edge.
But a lot of folks thought that that money would just evaporate and leave the stock market. And the volumes and the assets would leave as soon as COVID was over and everybody got back to their work or their daily life.
And in this report, that hasn’t happened. I mean, the inflows from the retail investors into the stock market are still here and alive and well. And that just shows me that even if, you know, a lot of the baby boomers may be locking up 5%, 6% or 7% in bond investments, and calling it a day, there are still a lot of opportunities in the market.
And when we talk about opportunities in the market, Mike, we’re not necessarily talking about this as the best time to be “buy and hold” in the market for the next 20 years. That may not be the case. It may be a sideways market for the next five or 10 years. Who knows?
But we’re talking about these actionable, shorter- to medium-term opportunities. And I love your trade room because you have a number of different approaches. Talk to me about how those different strategies you know… We talk about diversification in stocks — where owning a technology stock, and a health care stock and a utility stock — those give you a level of diversification because some zigzag. Do you find that that’s how your strategies operate as well?
Mike: That’s how it’s designed. Not a single strategy is going to work 100% of the time.
So we have short-term trend following. We have mean reversion. So trend following, you’re expecting prices to continue moving in that direction. Mean reversion, you’re expecting prices to reverse. You’re thinking of it like a rubber band. You stretch it too far, let it go, it snaps right back. So we have the rubber band type strategies right alongside the trend following, and then we have some safer strategies.
So one of them should be working all the time, and that’s the goal. It leads to a more steady stream of profits rather than the roller coaster that is so common in trading where you get a couple of big wins and then you give back 90% of it … you get a couple more big wins, then you give back 95% of it. And then you quit because big drawdowns make it hard to stick with it.
Adam: Yeah, that makes me think of my time at … I used to work for a technology and brokerage firm called TradeStation. I still use their trading platform today.
They were kind of the pioneers in being able to systematize and test rules-based trading strategies. And part of my role there was to do consultations, one hour — almost zooms before Zoom — with our clients. And it was everything from retail investors that had $25,000 in their account up to institutional desks. We had hedge funds and CTAs, and I was basically able to get into their software and see what they were, what algorithms they were trading and what strategies.
And I remember we had this one guy, he traded one strategy and it was a wild strategy. Sometimes it would be up 50% in a day, and other times it would be down. And we’d call him “Cowboy” because he was just that. He just was all-in on this one strategy.
And, you know, there were certainly a couple of months there in the beginning where it seemed like he was going to just become a billionaire. But eventually, he faded off into the sunset.
And what the long story short is, what I really saw was, that the folks that took a more measured approach and traded a basket of strategies. Like you said, I think that the simplest way to think about trading is that the prices move from $1 to $2. Is it going to go back to $1 or is it going to go up to $3?
So if you think it’s going to go from $1 to $2 to $3, you want to be in a trend or momentum type of strategy. If you think it’s going to go from $1 to $2 and then back to $1, you want to have something that catches a mean reversion move.
And we all know that the market environments change day to day and week to week. You can’t always predict which one’s going to be best for those. So having an ensemble or composite of those different types of strategies helps with the volatility and allows you to harvest that edge but in a more sustainable way.
Mike: I think so, because you can’t know in advance whether you’re going from $2 to $3 or $2 to $1. You can have a probability … you have a 60% chance this is going to happen. So that’s what you’re trading, is that edge.
Adam: Absolutely. Well, Mike, this has been a fabulous discussion. And I love talking to you and I love trading emails.
And we’ve, again, been good friends and colleagues for a long, long time. And I’m just thrilled that we were able to get you officially into the Money & Markets family and community. I think the folks at home who follow us are going to benefit immensely from having you on board and sharing your expertise.
Again, your financial market history, your trading strategies, your analysis. You’re an excellent writer. I love reading a lot of your work, and I can’t be more thrilled to have you by my side from here on out. So thanks again for this chat, and we’ll hopefully do this again soon.
Have a fantastic week.
Until next time,
Managing Editor, Money & Markets