When the Chaos Will End
Dear subscriber,
The market is undergoing a major reassessment today.
Not regarding expectations for the next month or quarter... but for what the next decade will look like for the economy.
Indeed, I warned that even with the market at all-time highs, there was an "undercurrent of fear."
Now, things are changing in a big way – and fast.
See, asset prices are based on investors' expectations for the future. For example, investors will likely bid up shares of a company if they anticipate huge growth over the next few months or years. In other words, it's all about what's next.
And this week, investors took a hard look at the future... and they've started to question the growth prospects for the U.S. market.
You can see this very clearly in bond yields...
Put simply, bond yields are driven by expected inflation and economic growth.
If investors expect a booming economy and rising inflation, they'll prefer the upside potential in equities and sell bonds. Since bond prices and yields move inversely, that means bond yields will rise.
On the flipside, if investors expect weak economic growth and lower inflation, they'll be more willing to accept the lower returns on bonds. They'll buy them up, and yields will fall.
Since February 12, the 10-year Treasury yield has fallen from 4.6% to 4.3%. That's a big drop in just a few weeks. And by looking at the 10-year real interest rate (the rate after inflation expectations are removed), it's clear that inflation isn't the problem...
In other words, the decline in the U.S. 10-year Treasury yield is due to a decline in expectations for economic growth. And that fear is driving bond prices up and stock prices down.
Just look at the S&P 500 sector returns since the index's peak on February 19. The sectors most aligned with economic growth – like information technology, consumer discretionary, and communication services – have been hit the hardest...
Much of this comes from worries that AI spending will slow (which you can read more about in the "What Our Experts Are Reading and Sharing" section below). But a cooldown in AI investments isn't enough to change growth expectations this much.
There's more to it than that.
My diagnosis... there's too damn much going on. And that's leaving investors uncertain.
The trouble is all the noise coming out of Washington, D.C.
A couple of weeks ago, we shared a chart of the monthly Global Economic Policy Uncertainty Index. It had surged to levels not seen since the pandemic – and it has only climbed higher since then...
The market can handle a surprise here and there. It even stayed strong through President Donald Trump's flurry of executive orders and pronouncements in his first month in office.
But the chaos is starting to take its toll. And it's hard to tally the long-term economic consequences of what looks like short-term decisions.
For one, we knew Trump was keen on cutting spending. But I don't think anyone expected this sort of speed and indiscretion. Unemployment claims in Washington, D.C. are already at recession levels...
(The long-term view is skewed by the pandemic, but it helps to see today's jobless claims in context of other recessions.)
Congress is also currently struggling to approve a budget, with one proposal narrowly passing the House.
That's, in part, because the proposal blows a huge hole in the budget. The House's blueprint pairs $4.5 trillion in tax cuts with only $2 trillion in spending cuts. Deficit-minded Republicans balked at first before coming around.
There's also the fact that no one expected Trump's administration to side so strongly with Russia and China on international matters, particularly the Russia-Ukraine war.
And certainly no one forecast Trump's attempt to pacify Ukraine with a deal on rare earth metals.
Plus, of course, there's Trump's 25% tariff threats on Canada and Mexico, which he says will kick in next week.
Now, it may sound like I'm complaining and I don't like Trump. But it's not about that.
Economic growth comes from corporate investment. When businesses put capital into new projects, it becomes revenue for other businesses, creates jobs, and fosters growth.
And, well... the business world is complicated today.
Imagine being an automaker trying to divine which countries to import parts from... or where to build a factory... or whether or not to invest in electric-vehicle manufacturing.
Or what if you're Big Pharma trying to anticipate the future path of innovation when the entire system of federally funded research has been disrupted?
Or what if you're sourcing rare earth metals for batteries? Where does Ukraine fit into your future plans? (Ukraine does have minerals in the ground, but most observers say the deposits aren't "economically viable.")
A recent report from global news platform Semafor included a list of quotes from dismayed CEOs...
Citadel's Ken Griffin says today is "a difficult time to invest." Hassane El-Khoury of ON Semiconductor (ON) said, "Everybody's paralyzed." And Tom Callahan, the head of Nasdaq Private Market, says, "The chaos that is reigning right now is causing everyone to sit on their hands."
Trump promised polices that would be friendly to business and economic growth, like fewer regulations and lower taxes.
Businesses would like those things... but they like predictability just as much. And Trump is hurting his own initiatives by moving too fast and breaking too many things.
Through that lens, these aren't short-term worries. These are big-picture, long-term worries. That's why the 10-year Treasury yield is falling. And it's why the 30-year Treasury yield is down alongside it.
So, what's next?
In my opinion, there are three reasons why we could be passing the worst of this chaos in short order...
First, feedback loops could reel in Trump's ambitions.
I believe Trump to be a president who reads the stock market as a public-opinion poll... and as we've covered, things aren't all hunky-dory there. This could encourage him to slow the pace of change.
And that may be history repeating...
In his first term, Trump started out with lots of changes before easing off the gas pedal. (He did squeeze in another flurry of executive orders on his way out, though, as most presidents do.)
Second, the CBOE Volatility Index (or "VIX"), which measures investors' volatility expectations over the next month, is still low. (So is a similar measure that looks out three months.) That means the market doesn't think the tumult will last much longer...
And third, while the S&P 500 is only down about 4.6% from its high, we have to remember that the index has become very concentrated.
A deeper analysis shows that the median stock in the index is already down 13% from its 52-week high.
That means we're further into a substantial correction than the headlines may suggest... and potentially closer to a bottom.
What Our Experts Are Reading and Sharing...
This week, markets worried that the billions being spent on AI infrastructure would start to slow. But Nvidia's (NVDA) earnings on Wednesday didn't show any signs of a slowdown... The chip giant raked in $39 billion in revenue in its latest quarter – up 78% year over year. Check out this thread on my nascent X account for more.
According to an article by management-consulting company Bain, spending on luxury items saw a slight decline in 2024. Overall, there seems to be a shift away from luxury goods to experiences. Spending on things like fine art and cars dwindled last year, while sales for experiences like luxury cruises, private jets, and yachts rose. The article is from a couple weeks ago, but it's a good report on the state of the luxury industry.
You can make a killing investing in small-but-growing restaurant franchises. Just look at success stories like Chipotle Mexican Grill (CMG) and Shake Shack (SHAK)... or more recent growers like Wingstop (WING) and Cava (CAVA). They come with volatility, of course – but they can also have massive upside. The Wall Street Journal reports that Dave's Hot Chicken may be the next buy in the restaurant space, worth $1 billion according to a nearly complete private-equity buyout.
New Research in The Stansberry Investor Suite...
The market is worrisome today. But that doesn't mean there's nowhere to turn...
One of the central tenets of Stansberry Research is that if you buy high-quality companies at reasonable prices, ones with strong balance sheets and durable businesses, you can hold them "through the cycle."
In other words, you don't need to worry about the company crumbling in a recession or correction. Its business and share price should hold up well, or at least better than its more cyclical or less defensive peers.
This month, we're highlighting a company that does just that...
It resides in one of the more defensive sectors that has come out on top in the recent market downturn. Its products are so simple, yet so vital, they keep customers coming back for more.
That's part of why it ranks so highly in our Stansberry Score – better than all but 34 out of the nearly 5,000 stocks we track.
I can't give too much away, as this company is a household name. But this is exactly the kind of stock that big institutions and funds flock to when the market gets scared.
Better still, this company earns a huge 18% free-cash-flow margin on its sales and it holds the rare title of Dividend King – something only about 50 other companies can claim.
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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