A Temporary Fix

Follow the oil... Speaking of voting... Trump responds to the Fed's rate hike... A new rate-hike cycle... This could make for some wild times... It's like 1999...

Follow the oil...

One day after the Federal Reserve raised its federal-funds rate for the first time in three years, Treasury yields fell, and stocks rose.

So what gives?

Well, as we told you going into the Fed meeting, the market expected a rate hike. So it didn't come as a surprise, although Fed Chair Kevin Warsh's post-meeting press conference did stoke some volatility yesterday afternoon.

Today, the market made up those losses. The action is tied to more developments in the Iran war, which has been driving the inflation story this year... and, ultimately, drove yesterday's Fed decision.

Higher energy prices are a big deal. After roughly six months of serious oil supply disruptions from the Persian Gulf, those prices are filtering downstream throughout the economy. As Nick Koziol wrote in yesterday's Digest...

In his statement, Warsh took a "hawkish" stance on continuing to fight inflation, saying that recent inflation releases – like last week's consumer price index ("CPI") – show that underlying inflation trends haven't improved. He added that too many inflation components are running above 3%.

Those comments indicate that more hikes could be on the way if inflation doesn't come down meaningfully.

That's not what the market wants to see...

The market wants to see a positive development... even if it's only a temporary fix. Today, it got one. Futures for U.S. crude declined by 1% to around $101 per barrel, and Brent crude traded down closer to 2%, to around $104.

With the Houthis disrupting passage from the Red Sea, Saudi Arabia has reportedly decided to make more crude cargoes available to Asian refiners through a "safe" (for now) port in Oman that avoids the Strait of Hormuz.

This is just a short-term "fix" amid the larger war in the Middle East. But Mr. Market is nothing if not a knee-jerk reactor – or a voting machine in the short run, as Warren Buffett once said, borrowing from his mentor Benjamin Graham.

Speaking of voting...

November's midterm elections are coming up fast. Whatever you think about the state of politics, this time typically marks the start of a good period for stocks.

Our colleague Brett Eversole made the case in his latest True Wealth Systems "Review of Market Extremes" issue, titled "The Best Year for Stocks Starts in Two Weeks." You see, as Brett says, where we sit in a president's four-year term is more important for stock returns than who the president is...

The person sitting in the Oval Office matters less to the stock market than you probably think. Sure, presidents can set policy goals and push legislation. But those are slow changes. And it takes even longer for their effects to trickle into the real economy.

Year 1 of the presidential election cycle tends to be good. Year 2 is terrible. Year 3 is great. And Year 4 is good again.

The pattern gets sharper when you measure those years from September 30 rather than January 1. Here's how each year of the cycle has performed going back to 1928 using that method...

The logic isn't complicated. As Brett explains...

In Year 1, the election has just ended. The market has certainty about who's in charge, so prices tend to rise.

Year 2 brings uncertainty back with the midterm elections. Historically, that's the toughest part of the cycle.

Then, Year 3 comes along. The president starts gearing up for the next election... which means pushing policies that focus on the economy. This change in posture leads to the biggest gains for investors.

In Year 4, the market enjoys the same pro-economy stance, but election uncertainty weighs on returns. The result is another year that's good – not great.

We're two weeks away from the end of Year 2 – the only stretch of the cycle that typically loses money, at an average of 2.7%. But stocks are up about 15% since the end of last September. That's roughly what a typical Year 3 delivers.

Put another way, this market has spent the past 12 months absorbing a war in the Persian Gulf, $100-per-barrel oil, and tariffs... it just got the first Fed rate hike in three years... and it has still put up a much better than average performance during the worst year of the cycle.

On October 1, Year 3 begins. Since 1928, it has averaged a gain of 15.2%.

We're not saying this is a reason to go all in on stocks. Plenty of individual years have gone the other way. But it's something to keep in mind as we look ahead to the rest of 2026 and beyond.

Trump responds to the rate hike...

It could have been worse.

President Donald Trump spent the past few weeks publicly lobbying for lower interest rates, but the Fed still went the other way – raising rates a quarter point, to a target range of 3.75% to 4%, with a unanimous 12-0 vote.

Yesterday afternoon, Trump took to Truth Social...

Interest Rates in the United States should be 1%, or less, because we are the Best Credit in the World – BY FAR.

He followed that up with...

The word "Deficit" is nothing more than a fancy word for LOSS. We are "carrying" almost every country in the World, and that cannot go on any longer. LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!

His response was somewhat expected... and not new.

What Trump didn't do is the more interesting part. As we wrote on Monday, a hike was likely to draw Trump's scorn. But speaking with reporters, Trump said he still has confidence in Warsh, and described a conversation the two had before the decision...

I... talked to Kevin... You might as well vote with the board because it's not going to matter. The board is very hostile. They're very political. They're doing the wrong thing.

So far, Trump's grievance isn't with the chair he chose but with the rest of the board.

However, yesterday's rate hike may just be the beginning.

In the projections the Fed released alongside the decision, the median expectation is for the fed-funds rate to be 4.1% by year-end. That would mean one more quarter-point hike before December. Sixteen of the 18 members of the Federal Open Market Committee expect at least one more hike. Four expect two. Warsh, notably, declined to submit a dot plot of his own.

A new rate-hike cycle has likely begun...

But it hasn't been totally "priced in" to the market yet.

Our colleague Mike DiBiase made the case in his newest Credit Opportunities issue last night, where he explained how government policy fuels inflation and why the Treasury's recently announced plans to increase its bond buybacks won't help...

The most reliable inflation predictor is accelerating. In the latest reading in July, the M2 money supply increased by 5.4%, the biggest year-over-year increase in 49 months.

Forty-nine months from July is four years and three months ago – June 2022. That's when the central bank was in the middle of its fastest rate-hiking spree in decades to "fight" decade-high inflation. The Fed's effective fed-funds rate went from 1.21% in June 2022 to 5.08% one year later.

Now, the Fed just made its first rate hike in three years, and benchmarks for inflation are closer to 3% than the central bank's stated 2% goal, which Warsh said he wants to return to on a "timelier" schedule.

The pace of inflation is already warm, and the sources of inflation are getting hotter. So prices could be on the verge of a big move higher.

I'm not saying rates will go another 4% higher from here. The gap between the Fed's goal and inflation readings is smaller now than it was four years ago. In early 2022, the Fed started raising its fed-funds rate from near zero when the consumer price index was at 7.5%, its largest year-over-year growth since 1982.

But directionally, we're in the same position today. We're in an environment where it's wise to expect higher interest rates before anything else.

This could make for some wild times...

If rates do keep moving higher, it could slow down the AI boom (and not just in the sense of AI CEOs welcoming government regulation as engineers publicly warn about the dangers of the technology).

The cost of money getting more expensive while AI companies and those heavily invested in the technology try to figure out how to make sustained profits (or any profits at all) won't make things any easier.

And the financials of the companies at the center of the boom, like OpenAI and Anthropic, aren't exactly an open book, since they're still private with initial public offering dates up in the air.

As Whitney Tilson shared in his free daily today, not all numbers and headlines – like Anthropic's reported 80% gross margins – are what they seem. Whitney wrote...

Another sign of an AI bubble is ridiculous financial metrics, as my old friend, legendary short seller Jim Chanos, points out in this X post:

Signs like these are why Whitney expects the AI bubble to pop in the same sort of way the dot-com bubble burst at the turn of the 20th century.

Right now, Whitney says it's like 1999 – the final stages of the dot-com boom days – rather than 2000, when the bubble peaked and started to burst.

As we wrote last week...

In 1999 alone, dozens of big names – most of them Internet companies – rose 1,000% or more.

But Whitney – with his friends' and family's money on the line and the stress that carried – ignored practically all of these hot stocks... "Because I knew most of them were doomed," he says. Instead, Whitney put his investors' money into a group of stocks nobody was talking about.

Over the next two years, the Nasdaq crashed, and Whitney's fund beat the market in nearly every year of the decade that followed. He says his approach tripled his investors' money through both the 2000 crash and, later, the downturn of 2008.

Whitney is prepared for history to repeat itself...

According to his research, the stocks that pass one particular screen have beaten the broad market going back to 1957.

And here's the thing: In the past 12 months alone, Whitney says these stocks could have doubled your money or better on 46 separate occasions. But most investors are still ignoring the corner of the market where you can find them.

"History is repeating itself," Whitney says, "and the window of opportunity is reopening again."

You can learn more about the stocks Whitney says could deliver 1,000% returns... and survive an unraveling of the AI-driven bull market right here.

New 52-week highs (as of 9/16/26): Alpha Architect 1-3 Month Box Fund (BOXX), Illumina (ILMN), Marathon Petroleum (MPC), and Valero Energy (VLO).

In today's mailbag, thoughts on the Fed's decision to hike rates... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"A rate hike will not change what is happening in the Middle East. The cost of oil will not go down with the rate hike but the cost of everything else will go up. Not sure how this will help inflation? Robbing Peter to pay Paul so to speak." – Stansberry Alliance member Phill N.

All the best,

Corey McLaughlin
Baltimore, Maryland
September 17, 2026