A 'Whipsaw' Event in Treasury Bonds
Dear subscriber,
In my style of investing, there's little need for up-to-the-minute tracking of economic data.
I'm usually looking long term... finding quality businesses to own for years.
But this past week was different. We had two huge economic reports coming out – one with the latest employment numbers, and one with the latest inflation data.
And I, like everyone else, was anxiously awaiting the results. So let's get to them...
On January 10, nonfarm payrolls for December came in stronger than expected (much stronger). The inflation data released January 15, on the other hand, was a dud. It wasn't low by any means. Rather, it was exactly what the markets were expecting. (We'll get to the exact figures in a moment.)
These reports absolutely whipsawed Treasury bonds. And today, the yield on Treasurys means everything to the market.
In the chart below, you can see that the 10-year Treasury yield shot all the way up to 4.8% on January 10, before easing off a bit...
This is an important chart to watch. The upcoming path of interest rates is the No. 1 indicator of which direction the market will go from here.
So let's break down the interest-rate narrative a bit, starting with the surge we saw after Donald Trump's election win.
The consensus opinion here was simple...
Trump will likely be business-friendly and good for the economy. He may also increase deficit spending, which will likely lead to an uptick in inflation.
Both of these things (growth and inflation) mean that investors will demand higher compensation for parking their money in safe government bonds. That, in turn, will send bond prices down. And as bonds prices fall, rates go up. Hence the rise in the 10-year yield we've seen since November.
Now, the Federal Reserve cut its benchmark rate – the federal-funds rate – in November and again in December.
Previously, investors thought more Fed rate cuts were coming down the pike. But the recent jobs report has thrown that into question. Nonfarm payrolls grew by 256,000 in December, well above the expectation for 155,000.
What's most shocking is that the federal-funds rate tends to follow the yield on the two-year Treasury... yet, after the report, the two-year Treasury actually peaked above the Fed's benchmark for a few days. That would suggest the end of rate cuts from the Fed...
That's still contrary to what futures markets predict. They expect one or two rate cuts in 2025. If the Fed does stop cutting rates, it'd be a big shock to the markets.
Next, let's look at the recent inflation data...
If inflation had come in hotter than expected, the script was simple: Rates would go up, stocks would go down, and everybody would start to worry about the incoming administration.
But on Wednesday, the inflation numbers brought essentially no news.
Month-over-month inflation was up a tad, rising 0.4% in December versus November's 0.3% increase. But that was right in line with expectations.
Annual inflation came in at 2.9%, up from the prior month's 2.7% rise... and, again, right in line with expectations. This sent the 10-year Treasury back down to around 4.6%.
It's hard to divine the direction of rates.
The market is wise to be concerned about increased spending and economic growth. It's the consensus opinion that inflation will pick back up under Trump. That's what a 10-year yield nearing 5% tells you.
Inside Stansberry Research, we're spreading our bets. As our own Brett Eversole expressed to me, it's hard to see rates getting above 5%. At that point, they really start to hamper the economy.
Our Investment Committee, which manages some of our portfolio products, has come down on the side of diversifying bets evenly between investments that benefit from rising rates... and those that benefit from falling rates.
When you can't pick a direction, diversify against it.
In sum, the recent movement in the Treasury market shows just how much volatility we may see in the near future.
Markets are calmer when no one cares about inflation or the jobs market. And today, they care a lot...
Very quickly, we'll be able to see what Trump does with tariffs and immigration. He can make moves on these policies in his first few weeks in office. And you can bet that they'll have big impacts on inflation expectations, interest rates, and stock prices across the board.
What Our Experts Are Reading and Sharing...
Trump isn't messing around on energy. He promised to open up drilling and cut electric-vehicle mandates. Now, his transition team is talking to oil lobbyists. And the lobbyists are talking with the Wall Street Journal. The chatter is that Trump will issue sweeping executive orders to boost energy production in his first few days in office.
We wrote some skeptical words about quantum computing as an investment last week. Perhaps we should be asking harder questions about the technology. This essay from science writer Dan Elton on Substack breaks down the technology... and throws a bit of cold water on the prospects for quantum. Specifically, he says, "No major algorithms of any note with a proven quantum advantage have been discovered since 1996."
According to Bloomberg, banks are going to make big money thanks to election volatility. JPMorgan Chase (JPM), Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BAC), and Citigroup (C) in particular are expected to see a combined 15% increase in trading revenue. (Subscribers of Stansberry's Investment Advisory know that we've already been investing in exchanges that make money from trading volume and volatility, via the stocks that follow our "Gatekeepers of the Financial Markets" theme.)
New Research in The Stansberry Investor Suite...
We've heard a lot about how AI will change everything. But it's not easy to find investments with true AI potential outside of big names like Nvidia (NVDA), Alphabet (GOOGL), and Microsoft (MSFT).
That's because these market behemoths, with their economies of scale and deep pockets, typically crush the smaller competition.
But this month, the Stansberry Innovations Report team has found a true AI innovator in the advertising industry.
It's able to track customers by household. In other words, it can connect people's behavior across different devices, like their phone and television, by analyzing their data. This allows advertisers to fully maximize their return on ad spend.
Plus, it doesn't rely on first- or third-party cookies, meaning it avoids all the privacy concerns and regulations that have made things difficult for the industry.
This company also has a do-it-yourself online tool for buying digital-advertising inventory, and it's the first to market with an autonomous-advertising platform. Advertisers put in key details... and this company develops a comprehensive ad plan in minutes.
Now, this is a small company. But it has plenty of room to grow and, according to our analysts, it's at an important inflection point – it's just about to turn the corner to profitability.
This innovative company's trifecta of technology will make it one of the most in-demand names of the evolving advertising landscape.
Stansberry Investor Suite subscribers can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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