The market’s wild swings over the past week likely had you reaching for antacids.
Folks returned from the holiday season in a very positive mood, driving the S&P 500 1.6% higher in the first three trading days of the year. The NASDAQ’s performance was even more impressive, as the tech-heavy index surged 2.9% in three days.
But since then, all major indices have erased their early January gains. So, what’s behind the recent decline?
Rising Treasury yields are a major factor behind the volatility. So, in today’s Market 360, we’ll take a closer look at the bond market and what’s driving yields higher. I’ll also explain why you shouldn’t worry about the recent gyrations. I’ll share the two catalysts that should trigger another market rally over the next few weeks… and how you can prepare for it.
What’s Going on With the Bond Market?
Treasury bond yields have continued to spook Wall Street in the early trading days of 2025.
Five weeks ago, the 10-year Treasury yield was 4.17%. Today, it’s 4.8%.
That’s a big move for bonds.
The fact of the matter is there are concerns that inflation will be reignited under Trump 2.0. The bond vigilantes see the Biden administration is spending up a storm on its way out, and they’re convinced that we’re going to have renewed inflation sparked by major deficits and tariffs under Trump 2.0. So, in order to make a point, they have sold off their bonds, which has added to the recent rise in Treasury yields. In other words, the bond vigilantes are holding the market hostage.
Bond vigilantes are investors who sell bonds to protest a government’s fiscal policies. By doing this, they “send a message” because this selling raises interest rates and makes it more expensive for the government to borrow money. It’s a way for the market to push back against things like too much spending, high inflation or growing debt.
Now, I happen to disagree with them, and I think they’ll be proven wrong in the end.
They also weren’t happy with last Friday’s jobs report. The Labor Department revealed on Friday that 256,000 jobs were created in December, which crushed economists’ expectations for only 165,000 jobs. The unemployment rate also declined to 4.1% in December, compared to 4.2% in November. Overall, two million jobs were added in 2024.
Clearly, the December payroll report was positive, but the problem is that it may lead the Federal Reserve to hit the brakes with key interest rate cuts. Bond yields climbed higher in the wake of the jobs report, which, in turn, caused stocks to decline.
Looking Ahead
Now, I realize all of this talk about bonds may seem a little dull. But this stuff is important. In fact, James Carville, the famous political strategist who led Bill Clinton to the White House, once said:
I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.
This speaks to the bond market’s power, folks.
But the reality is that the U.S. dollar has also continued to strengthen since the start of the year. A strong U.S. dollar helps suppress inflation on imported goods. So, Treasury bond yields should decline as inflation fizzles and central banks around the world continue to cut key interest rates in order to shore up their weak currencies and stimulate economic growth.
I suspect that our Fed will follow suit despite our strong currency and economy. Just last week, Fed Governor Christopher Waller stated that inflation will continue to cool toward the Fed’s 2% target, and he reiterated his support for additional key interest rate cuts this year. He said, “As always, the extent of further easing will depend on what the data tell us about progress toward 2% inflation, but my bottom-line message is that I believe more rate cuts will be appropriate.”
Waller noted that the pace of rate cuts this year will depend on inflation and the jobs market. Fed Presidents Collins (Boston) and Hawker (Philadelphia) reiterated Waller’s views, stating that more key interest rate cuts would be forthcoming, but the timing was uncertain.
Thankfully, we’ll gain a little more clarity on the inflation situation this week. This morning’s Producer Price Index (PPI) showed that wholesale inflation cooled in December, and I expect tomorrow’s Consumer Price Index (CPI) to reveal that consumer inflation is cooling off, too. The current consensus calls for inflation to be flat on a month-to-month basis at 0.3% and to rise to 2.9% (up from 2.7%) on a yearly basis. Core CPI, which excludes food and energy, is anticipated to remain unchanged at 3.3%. (I’ll cover the PPI and CPI readings, as well as the latest U.S. retail sales report, later this week, so stay tuned for that.)
Get Ready for the Next Rally
Now, I know these wild market swings can be gut-wrenching. The good news is we remain in a stock-picking environment, where stocks with superior fundamentals – accelerating earnings and sales momentum, as well as positive analyst revisions – will attract the most attention.
That’s important with the fourth-quarter earnings announcement season set to kick off tomorrow with the big banks.
Earnings momentum should hit the gas in the fourth quarter – FactSet expects the S&P 500 will achieve 11.9% average earnings growth.
And it’s set to accelerate in every quarter of 2025, too – with earnings growth of 11.9%, 11.6%, 15.2% and 16.6% in the four quarters of this year, respectively. Calendar year 2025 earnings are forecast to soar 14.8% year-over-year, up from current estimates for 9.5% in calendar year 2024.
I believe better-than-expected quarterly results will drive the majority of my Growth Investor stocks higher in the upcoming weeks, as they’re backed by even stronger earnings and sales growth.
My Growth Investor Buy List stocks are characterized by 515.9% average annual earnings growth and 23.6% average annual sales growth. Plus, my Growth Investor stock’s average earnings surprise was 21% in the third quarter. And with analysts continuing to revise their earnings estimates higher for my Growth Investor stocks, I anticipate another exciting round of earnings surprises.
But it’s not just earnings that should drive stocks higher… I look for Donald Trump to positively impact the stock market, too.
Once Trump takes office on January 20, I predict he will sign a sweeping series of executive orders in his first 100 days that will trigger what I call “Trump’s 100-Day Melt-Up.”
That means you would be wise to position yourself NOW. And I’ve identified a handful of picks that I expect to prosper...
I’ve prepared everything you need to know in a new special presentation.
In it, you’ll learn about…
- My top pick for a manufacturing renaissance under Trump 2.0.
- A little-known company that’s helping build the data centers that will develop the next generation of AI.
- A separate energy play for “drill baby drill” that could help power this entire AI revolution.
- And I’ll explain how Trump’s pro-Bitcoin policies could send an under-the-radar stock higher than anyone can imagine.
Go here for all the details on how to profit from the 100-Day Trump Melt-Up now.
Sincerely,
Louis Navellier
Editor, Market 360
