What to Make of These Recent Trend Reversals
Dear subscriber,
This week, I brought my daughter to gymnastics at a mega-gym in Maryland.
Other dads who know what I do often want to hear about stocks or inflation. But this week, I sat with a dad named John... and spent the hour figuring out what he thought.
John runs a commercial property and casualty insurance brokerage.
As longtime Stansberry Research subscribers know, we love the insurance industry. Time and again, our team has referred to it as the "world's best business." And it has proven to be fertile ground for great investments.
Today, the insurance business is tough to figure out...
The hurricanes that have battered the U.S. this year have raised demand for insurance, as folks realize they need more coverage. And heavy demand means insurers can charge more in premiums to cover losses.
Auto-insurance rates, for instance, have already soared. But John expects them to go even higher to pay for all the vehicles wrecked by the storms.
At the same time, reinsurers – who insure other insurance companies – will set their rates at the start of 2025. And come January, they'll also likely raise prices to cover losses. That means insurance companies are facing higher costs as well.
Now, John had questions for me, too. He's in the process of building a house, so he asked me about the path of mortgage rates over the next couple years.
That may be even tougher to understand...
We all have important financial decisions to make – when to buy a house, when to invest a lump sum, when to set up retirement income streams. And many of these decisions rely on forecasting the future.
That's difficult even for professionals.
Most folks expect current trends to continue. Right now, they see cheaper mortgages and higher stock valuations in 2025.
And that forecast is likely spot-on, though it may not seem so in the short term...
This week on Wall Street, we saw multiple narratives that had been driving the market start to unwind.
For one, the labor market may be stronger than folks think. September payroll numbers published last Friday blew expectations out of the water, with employers adding 254,000 jobs instead of the expected 140,000.
That's good news for workers, of course. But it means that the Federal Reserve may not need to be so aggressive in its efforts to boost the economy.
Meanwhile, September inflation stats released this week came in just a bit high.
The month-over-month change in core inflation (which excludes volatile food and energy prices) clocked in at 0.3%. That's more than the expected 0.2%. And that rate, on a monthly basis, can add up over the long term.
As a result, interest rates made an about-face from their recent trend downward...
In the chart below, you can see the spike in short-term rates. The highly reactive U.S. two-year Treasury yield has risen from about 3.5% at the end of September to nearly 4% today...
And in a truly ironic turn of events, the 10-year yield – which typically doesn't move as quickly as the two-year – is up 50 basis points since the Fed's 50-basis-point cut.
Now, the Fed controls the federal-funds rate. And that rate acts as a benchmark for interest rates across the market... But bond yields are still set by supply and demand.
So while a 50-basis-point cut in the federal-funds rate should eventually trickle down to other rates, it won't happen overnight.
I'll get back to interest rates in a moment. But while we're on the topic of trend reversals, let's check in on the Chinese stock market's latest rally, which has also turned the other way...
As I warned last Friday, Chinese stocks surged too far, too fast on the government's aggressive stimulus plans.
Investors got ahead of themselves, and the market crashed hard. The iShares China Large-Cap Fund (FXI) – which tracks the performance of the largest publicly traded stocks on the Hong Kong stock exchange – fell 9% on Tuesday alone...
Goldman Sachs reported that hedge funds sold a record amount of Chinese stocks that day.
That doesn't mean China's comeback is over.
Brett Eversole, editor of True Wealth and one of our in-house experts on the Chinese market, told me earlier this week that he's already heard whispers the Chinese government is set to reveal more stimulus.
Just yesterday, after the government announced a weekend press briefing with Finance Minister Lan Fo'an, Chinese stocks started climbing again.
We'll see how this story continues to play out. But as I said last week, China announcing an aggressive stimulus package isn't enough. It has to prove that it's making a big, long-term shift to revive the economy. Only then will we see the makings of a long-term trend.
But back to John in Maryland...
Like countless other folks today, John had a lot of questions on mortgage rates and the state of the housing market.
Mostly, he wanted to know when mortgage rates will come down. Again, that's a tough question to answer...
Interest rates are one of the hardest things to predict. That's because there's always uncertainty... some huge economic boom or bout of inflation could change the Fed's path.
Yet, even with the labor and inflation surprises I mentioned earlier... the broad state of the economy still justifies a glide path lower for interest rates.
Expectations for where the federal-funds rate will be next October, as determined by the futures markets, have risen from around 3% to 3.5%.
That's a big change, and it largely stems from the recent trend reversals we mentioned earlier. But the overall direction is still down...
Mortgage rates typically sit 1% to 2% above the 10-year Treasury yield, which tends to be a bit above the federal-funds rate. So it's hard to put an exact number on where mortgage rates will be 12 months from now.
Currently, mortgage rates sit at about 7%. That's below the 8% they hit in 2023, but still well above their 20-year average of 4.8%.
I expect they'll head lower next year, alongside the federal-funds rate.
But as I told John, rates and other asset prices can always surprise us in the short term. So it's important to keep an eye on the broader trend.
When it comes to investing, don't try and trade on a single jobs report or one month of inflation numbers. Ignore the short-term noise... and stay focused on high-quality assets that build wealth over years.
What Our Experts Are Reading and Sharing...
Interest rates are extremely consequential. And lots of people ask me how changes in interest rates affect mortgage rates. The Brookings Institution published a timely paper that lays it out clearly. It discusses what led to the 2023 peak in mortgage rates... what caused today's partial reversal... and where they'll likely go from here.
Our own Corey McLaughlin recently published a two-part China Explainer in the Stansberry Digest. China is volatile today – and Corey and Stansberry Research's Dan Ferris sat down with KraneShares' Brendan Ahern this week to discuss exactly what's going on. To see hear more about their conversation, check out Part I and Part II of Corey's China Explainer. You can also watch their full interview on the Stansberry Investor Hour podcast.
Corey, Dan, Brendan, and I will all be in Las Vegas in two weeks for the annual Stansberry Conference & Alliance Meeting. I've lost count of how many of these I've attended, but I still look forward to it each year.
Our in-person tickets are sold out. But you can still purchase a livestream ticket and get digital access to both days of the conference. Trust me, you won't want to miss our incredible lineup of speakers, including Michael Lewis, Billy Beane, Rick Perry, Dave Barry, and more.
Large language models ("LLMs") are taking the AI market by storm today. There's ChatGPT from OpenAI, Gemini from Google, Llama from Meta Platforms (META), Claude from Anthropic, and many more. If you're still trying to figure out how AI LLMs work, here's an "intuitive guide" by tech founder and CEO Jeremiah Lowin. I'd describe it as just the right amount of math.
New Research in The Stansberry Investor Suite...
Like most investors, you're probably guilty of one big bias when it comes to choosing stocks.
For the past decade, that hasn't mattered. This bias has likely earned you better returns.
But that won't be the case in the years ahead... because one long-term trend is about to reverse course.
So you need to understand this bias and, more importantly, correct it before it's too late.
We're talking about "home country" bias – the tendency to favor domestic stocks over foreign stocks.
As senior analyst Mike DiBiase discusses this week in The Stansberry Investor Suite, only around 15% of American investors hold non-U.S. stocks.
That's a huge mistake, and Mike employs the Global Elite Monitor to show you just what you're missing.
He highlights one "global elite" business – a 168-year-old British fashion house – that's trading at a huge valuation discount today.
Its free-cash-flow yield is about 15%... five times cheaper than the expensive S&P 500 Index. This is exactly the kind of opportunity having a home-country bias would lead you to miss.
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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