As Matt wrote yesterday, the Fed just cut interest rates for the first time in 10 years.
The federal funds rate is an important number. It impacts everything from your mortgage payments, to the yields you generate from your income investments.
But today, we’re going to introduce you to a rate that’s even more important.
As you’ll see, it just hit a critical threshold…
And if you don’t act on it very soon, it could mean disaster for your portfolio!
Are We Headed for a Crash?
If we could determine whether the market is undervalued or overvalued, we could determine whether we’re headed for a bull market — or a nasty crash.
Well, I’m about to show you a simple “rate” that can reveal everything you need to know.
The rate I’m referring to is called the Earnings Yield. It’s very easy to calculate:
You simply divide a company’s annual earnings per share (EPS) by its stock price.
For example, if a company’s EPS are $2, and its stock trades for $20, its earnings yield is 10%.
This helps us understand what an individual stock is “yielding” in terms of profits.
Earnings Yield for the Entire Market
But here’s where things get interesting:
We can also use the concept of Earnings Yields to value the entire stock market.
For example, in the chart below, you can see the earnings yield for the S&P 500 going back nearly 100 years:
And if you review the data carefully, you’ll discover something extremely important about the relationship between earnings yields and the direction of the stock market:
When the earnings yield rises quickly, it can indicate that we’re heading into a major upswing…
But when it drops — especially below a certain level, which I’ll reveal in a moment — it can indicate that we’re about to experience a major correction!
History Repeating Itself?
Based on calculations for 2019, the S&P 500 earnings yield currently sits at 4.6%.
The last time this rate was so low was in Q3 2018. At that time, the earnings yield hit 4.47% — and 60 days later, the market tumbled by 20%.
Rates also got this low in Q3 2015 — and the market fell by 10% in a single month.
They also got this low in December 2007 — just before The Great Recession hit. In just a few months, the market lost more than 60% of its value!
Now that we’re once again sitting at these critical levels, it’s time to ask some tough, scary questions:
Is history about to repeat itself?
And if so, what can we do to protect ourselves?
Protect Yourself from This Correction
To answer these questions for you, here’s what we plan to do:
Next week, we’re going to share our “battle plan” for surviving — and thriving! — during what we expect to be a painful market downturn.
As you read this, we’re busy at our offices putting together a detailed plan for you and our other readers.
Everyone else might get caught flat-footed when the market crashes…
You, on the other hand, will be prepared for what’s coming — and be in position to profit from it.
But only if you read next week’s newsletter articles!
So stay tuned!