The 'Gravity' of Finance
Dear subscriber,
Not much happened this week on Wall Street.
At least, according to the wild expectations traders had after the tumult of the past few weeks.
If you want to see it in one number, look at the CBOE Volatility Index ("VIX"). The VIX measures traders' expectations for volatility. And it posted a massive reversal.
As you can see, the spike in the VIX during the early August panic was notable. But the turn back down is huge... something we haven't seen since after the pandemic and the global financial crisis.
The VIX is known as the market's "fear gauge." It measures investors' fears concerning the next few months. If this were a horror movie... the spike we saw at the beginning of August would have been more of a jump scare than a continual build of tension.
One slow jobs report and the unwinding of the yen trade looked to many like the start of a volatile period. Instead, we've had a quiet week as far as stocks go.
Of course, there are huge outstanding questions about the economy. And investors continue to search for signs of what's to come.
Over the past couple weeks, we've gotten mixed results.
Consumer sentiment surveys from the University of Michigan came in a little better than expected.
However, the Leading Economic Index from the Conference Board – which combines a handful of forward-looking indicators for the U.S. economy – came in weaker than expected... as did industrial production data.
Last week, we told you that folks had stopped fixating on inflation reports to gauge economic health. This week, everyone focused on the jobs revision report.
This report updates the U.S. Bureau of Labor's job statistics for 2023 with better, more accurate numbers.
Historically, no one has cared about this report. Now, it's all anyone in the markets is talking about.
According to the report, between last year and early 2024, the economy added 818,000 fewer jobs than previously thought. Still, markets managed to shrug the news off.
Rather than search for what may move markets, let's focus on the one thing that will...
Interest rates continue to be the only story you need to know about markets.
In June, we told subscribers of Income Intelligence...
[There's] one aspect of the financial world that functions almost as a physical system. It's the key driver of asset prices and investment performance... no matter the market environment.
It's a force that we can model with scientific precision. I call it the "gravity" of finance.
I'm talking about interest rates.
Every asset's value is pegged to interest rates.
Look at sector returns since the market peak on July 16...
The leaders here are utilities, consumers staples, and real estate.
These are all interest-rate-sensitive sectors.
Utilities stocks are typically boring dividend payers (with the broader S&P 500 Utilities sector yielding about 3%). When the focus of a sector is dividends, that leads stocks to behave more like bonds and move with interest rates.
Consumer staples are similar to utilities. They're a bit boring, with a substantial dividend yield (about 2.7%), though not as directly linked to interest rates as utilities.
And finally, the real estate sector – made of real estate investment trusts – typically trades on yield... not on real estate values.
The market is preparing for rates to come down. And the Federal Reserve is making it clear that will happen.
This week, the Fed published the minutes from its July 30 to 31 meeting. They state...
The vast majority [of policymakers] observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.
Many participants commented that monetary policy continued to be restrictive.
This is all careful signaling from the Fed – rates are coming down.
Now, what to do...
Falling interest rates are a positive thing for asset prices, but they come down when the economy is slowing. Those are two opposing ideas. Which should you put your money behind?
As our colleague Brett Eversole wrote to subscribers of The Total Portfolio back in March...
When you study the history of Fed rate-cutting cycles, it's easy to shape the data into whatever story you want to tell.
If you've got a bearish tilt, you can flag a rate-cutting cycle as a marker of pain to come. After all, the Fed often cuts rates when the economy is facing recession. And every major stock market decline happened alongside a major recession.
If you want to spin the data bullish, you can note that lower rates act as stimulus. They should move stock prices higher. And on average, stocks do move higher after the Fed begins cutting rates.
After a good deal of slicing and dicing stock returns through 13 rate-cut cycles dating back to the 1970s, Brett summarized the following results...
The big difference between average returns and median returns highlights that most rate-cut cycles are good for stocks... but the bad cycles are very bad.
Here's Brett again...
There's a simple way to differentiate between a good rate-cutting cycle and a bad one...
If the Fed is cutting rates because the economy is in trouble – or if economic turmoil is already underway – that's a bad thing. Really bad.
That's the situation we saw during the 1973 bust... the dot-com blowup... and the great financial crisis. The Fed cut rates in each case. And it cut them because the economy was aggressively rolling over.
If the economy isn't crashing, then rate-cutting cycles tend to work out just fine. That's where we are today.
We're still in a period of "data dependence" for investors. Watch the economy. Watch the Fed. But the conclusion, for now, is that the bull market can continue.
What Our Experts Are Reading and Sharing...
Another interest-rate-sensitive asset is gold. If you earn less in bonds, gold looks more attractive. And the price of the yellow metal is soaring today. Our own Corey McLaughlin runs through the case for gold in the Stansberry Digest.
Here are some more mixed signals on the economy... McDonald's (MCD) latest earnings results say that consumers are hurting. But Chipotle Mexican Grill's (CMG) earnings say the opposite. A recent article from the Economist explored the different realities for each food chain (and also managed to get in several digs at American food). According to the U.K.-based pub, "[It] is too soon to conclude that growth in American consumption has stalled."
Elon Musk keeps promising, and delaying, a fleet of Tesla "robotaxis." Meanwhile, Alphabet's (GOOGL) autonomous-vehicle subsidiary, Waymo, has quietly reached 100,000 paid robotaxi rides per week, as reported in TechCrunch. Our own Whitney Tilson has long been bullish on Waymo's prospects in the self-driving-car race. Now it's making big leaps ahead.
New Research in The Stansberry Investor Suite...
As an investor, you need to keep two things in mind today...
First, interest rates are set to fall. That should be a boon for many stocks going forward.
Second, the economy is slowing a bit. That will be a major challenge for certain stocks... in particular, consumer-facing companies with unsound businesses.
We watched one such business undergo a huge drop in its Stansberry Score over the past month.
It has had challenges in recent years, but each quarter seems to bring worse news. The Stansberry Score (and our fundamental analysis) is telling us to stay away.
The interesting thing is... it's part of a booming industry. Newly permissive regulation has led to a huge surge in this part of the economy. Many individual investors own these stocks, expecting big gains.
While the industry has tons of opportunity, this specific stock is the wrong way to play it.
As a Stansberry Investor Suite subscriber, you can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our new special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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