The Bond Market Isn't Buying What the Stock Market Is Selling

Inflation matters... The reaction to today's inflation report... Semiconductors are cooling off... The bond market isn't buying what the stock market is selling... A big nothing-burger… The best investment you can make... Another busy mailbag... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Inflation matters... The reaction to today's inflation report... Semiconductors are cooling off... The bond market isn't buying what the stock market is selling... A big nothing-burger… The best investment you can make... Another busy mailbag... --------------------------------------------------------------- We must begin today with the latest inflation news... I (Corey McLaughlin) never thought I'd ever write about the consumer price index ("CPI") as much as we have this year... Yet here we are again because, well, inflation matters. Today, the Bureau of Labor Statistics published the July CPI report, the latest "official" gauge of inflation, measuring the prices of a basket of goods and services paid by Americans each month. For once, it wasn't the worst report we've seen in the past 12 months... The headline number – which measures year-over-year monthly gains – decreased slightly to 8.5%, down from June's reading of 9.1%. Looking into the details, this outcome was mostly because of lower gas prices. Food costs and rents continued to rise last month. But it is notable that when looking at the number month over month, the change in CPI was flat, compared with a 1.3% rise in June. That ends 16 straight months of price accelerations... Our Stansberry NewsWire team has more details on the report [here](. As we've written before, we can debate the accuracy and usefulness of these CPI numbers – meaning whether they really reflect real-world inflation. But at the very least, by looking at the same set of data each month, we can get a good "directional" view of inflation. And despite what we may think, Mr. Market cares about these things. Stocks closing higher today and the headlines about inflation might lead you to believe that inflation will be fixed soon... and that the market reaction was overwhelmingly positive to the latest data. But that's not quite the case... This report showed that some inflation is decelerating, while other prices are accelerating. And as we'll explain, the market reaction was more mixed, just like the inflation report itself. Things weren't so bad on the surface (as in, "Maybe this is finally peak inflation!"). But under the surface, they weren't so solid (as in, "Those numbers are still really high and not all of them are going down")... The U.S. stock indexes surged higher today... Stocks popped this morning after the CPI report. By lunchtime, the benchmark S&P 500 Index was up nearly 2% and the tech-heavy Nasdaq Composite Index was up closer to 3%, building on an ongoing rally in stocks that began in mid-June. But beneath the headline number, the move might not be as strong as it appeared. First, remember, "bear market rallies" should be expected in the environment we're in today. And as [we wrote yesterday]( our colleague and Ten Stock Trader editor Greg Diamond said the recent strength in stocks might not last. He is seeing enough "divergences" among key sectors and stocks – some still rising, others not – that suggest this rally might be close to done... This modern-day leading indicator is cooling off... Take semiconductors, for example... The semiconductor sector serves as a kind of a modern-day Dow Jones Transportation Average, given that semiconductors power a lot of the technology that we use today. Think about how much business derives from these little chips, and how essential they are to modern life – much like planes, trains, and automobiles have been for even longer. Because of this, the performance of semis – like the "transports" – can be a good leading indicator for the stock market in general, and tech stocks in particular... So let's take a look at their behavior today. Since its most recent low in early July, the VanEck Semiconductor Fund (SMH) is up an astounding 25%... (Thanks, CHIPS and Science Act.) Taiwan Semiconductor Manufacturing (TSM) and Nvidia (NVDA) are the leading names in this fund. You might say, "Well then, if semis are a leading indicator, the rest of the stock market should follow, right?" Well, it has for the last month or so. But lately, semiconductor shares' run higher has cooled... Over the past week, semiconductors as a group are down 3%, even with a nearly 4% gain today. This could be a signal the broader rally in stocks might be losing steam... Here's what Greg shared in [an update to Ten Stock Trader subscribers]( this morning after the not-so-bad CPI report... My initial reaction, especially looking at the semiconductor stocks, was "That's it?" These stocks are up on the day, and could continue to rally... but I'm not impressed. For more details, including the key levels Greg is watching in semiconductor stocks and other sectors and names, existing Ten Stock Trader subscribers and Alliance members can follow his latest updates [here](. Greg then mentioned what you could describe as another interesting divergence. Interest rates – a good barometer for inflation expectations – didn't make new lows despite what, on the surface, looked like a signal of "peak inflation." As he said... This tells me the bond market is not buying what the stock market is... No, it's certainly not... We can't shake what the yield curve is saying... U.S. Treasury yields are still trending higher... and short-term yields are higher than long-term bond yields. This tells us that Treasury investors are nervous about the economy. We'll repeat what [we said last month]( about the $22 trillion Treasury market... Typically, longer-duration bonds pay higher interest than shorter-dated Treasurys. This makes sense... When you lock your money up for a longer period of time, you'd want a higher interest rate in compensation. But this "yield curve" behavior goes upside down sometimes – and when it does, it has been a reliable indicator of trouble ahead for the economy. That's what we're seeing today... The widely followed 10-year/2-year yield spread dipped to negative 0.48 percentage points yesterday. That's its lowest level since March 2000, the peak of the dot-com bubble. Today, the 2-year Treasury yield fell by less than one-tenth of one percentage point to 3.22%. The 10-year moved even less, trading at 2.79%, meaning the bond market looked at the CPI report and basically saw it as a nothing-burger. Pair that reaction with the idea that a negative reading in the 10-year/2-year spread has preceded each of the last 11 recessions since 1955, while it flashed only one false positive... and we see that the bond market isn't buying what the stock market is selling. Of course, an inverted yield curve doesn't mean stocks necessarily will fall further... Remember, as our colleague Brett Eversole [put it recently]( if the economy is a man seeking to calmly walk his dog, the stock market is the dog yanking on its leash – sniffing stuff and acting frazzled... Man and dog, economy and market can and do move at different paces. Maybe all the economic pain of a recession – and Federal Reserve rate hikes likely to deepen it – are already "priced in" to stocks, and the market is looking past it all. At least some pain has already been realized. That's why the sell-off started in January... What's more, stocks have historically rallied about 21% for 18 months, on average, before peaking after a yield-curve inversion... Today, we're already in a bear market and the Nasdaq has rallied by that in the last two months. All in all, we see a mixed message today. Stocks are forward-looking and they were up. Bonds are forward-looking, too, and typically reflect more about inflation than stocks – and they didn't budge significantly... Pay attention to both. The Best Investment You Can Make The body is limited in ways that the mind is not. By the time most people are 40 years old, their bodies begin to deteriorate. But there is no limit to the amount of growth and development that the mind can sustain... These are the words of Indian immigrant Gautam Baid, who joined Dan Ferris in the latest episode of the Stansberry Investor Hour. Baid's tale is inspiring. He went from working as a hotel clerk to founding his own investment firm and receiving praise from Warren Buffett... And he says he did it by making the best investment anyone can make... [Click here]( to listen to this episode right now. And to catch all of the videos and podcasts from the Stansberry Research team, be sure to [visit our Stansberry Investor platform]( anytime. --------------------------------------------------------------- Recommended Links: [**MAJOR CRYPTO WARNING**]( This top analyst is issuing his first-ever crypto warning: "We're now just days away from a line-in-the-sand moment for cryptocurrencies and the banking system." If you own any bitcoin, Ethereum, or crypto-related assets... or even if you simply have cash in a bank, [here's exactly what you need to know BEFORE August 31](. --------------------------------------------------------------- [Is This 'America's Nightmare Winter'?]( This could be much bigger than car, food, and computer-chip shortages. And Bloomberg says it's "a situation that could worsen heading into winter," causing serious problems in nearly every sector. Will it affect you and your money? [Find out right here](. --------------------------------------------------------------- New 52-week highs (as of 8/9/22): Automatic Data Processing (ADP), Centene (CNC), General Mills (GIS), ShockWave Medical (SWAV), and Waste Management (WM). Another busy mailbag today. We have feedback on yesterday's Digest... and more thoughts on what the Federal Reserve can and cannot do... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com. "Dear Corey, your August 9 issue, above subject (Inflation Reduction Act) was right on. I might add, right now it seems the only difference in the United States and the Titanic is, the Titanic had a live band!" – Paid-up subscriber Jack F. "Although I agree with your points, why doesn't Stansberry ever comment on tax cuts that inevitably increase the debt? Certainly we have a spending problem that can only be solved by making very difficult choices but, please, let's talk about deep tax cuts that are not accompanied by real spending cuts." – Paid-up subscriber Charles S. "Hi Corey, Regarding the use of percentage of stocks above their 200DMA, Porter actually mentioned the number during his March 2020 GOAT [Greatest of All-Time] presentation... "I presume you guys are using NYSE stocks as the base? Porter's number is a bit of a stretched target to the downside. Not all significant corrections will hit his number if using NYSE stocks, e.g. 2015 to early-2016. "I find that 40% is pretty much an 'all clear' signal... so not really necessary to be a majority of stocks. 35% is also ok-ish, although there may be big re-tests of the major low e.g. 2002-2003 period. "I use percent of S&P 500 stocks above their 200 DMA which has similar results as above, but has an 'easier' time going below Porter's number. Cheers." – Paid-up subscriber Vince T. Corey McLaughlin comment: Thanks very much for the note, Vince. Yes, we actually cited this same indicator back in March 2020 during the COVID-19 panic, and yes, we're referring to NYSE-listed stocks (as they give a great representation of the "market"). Here's what I wrote [in the March 23, 2020 Digest]( while talking about Porter's presentation that week, in which he correctly nailed the panic bottom. Things couldn't get much worse, as far as this indicator showed... Today, for example, fewer than 3% of the stocks trading on the New York Stock Exchange ("NYSE") are above their 200-day moving averages (200-DMAs). The 200-DMA is a good measure of whether stocks are in a long-term uptrend or downtrend. For context, in late 2018 – the last time the major indexes dropped double-digits in short order – the number of NYSE stocks trading below their 200-DMA dropped to "only" 10%. The last time the numbers were this low was during the financial crisis... And back then, the number of stocks trading above their 200-DMAs lingered below 10% for months, from October 2008 until the ultimate bottom in April 2009. Throughout history, only when this number gets close to or above 15% is the market "safely" rebounding... We said "safely" back then because there's no guaranteed result of a straight line up and to the right from a bottom. Though in the case of the COVID panic rebound, that's essentially what happened. As you mention, there can often be – in technical terms – retests of the low... As of today, the number of NYSE stocks trading above their 200-DMA has crept back to around 30%. Like we said yesterday, that's a notable move up from 15% last month, but this indicator still hasn't moved above its previous highs from June. We'll keep watching... "Andy B. is arrogantly assuming a lot with his calculations for Albert. How does he know his circumstances? What about car insurance and repairs? Does Amazon pay for all health and dental care? What about toiletries... toothpaste, soap, floss, etc. Then there's laundry. Is he renting? Does he have a washing machine or does he have to go to a laundromat? Is he paying back student loans, credit cards, some other event in his life we have no idea about, alimony, child support...?" – Stansberry Alliance member Catherane K. "Reader Larry N. (DDS) is right on when he said 'The point is the Federal Reserve has no fine tools to control inflation, just a chainsaw. Congress and the President have the fine tools to use, but are like idiots that didn't go to dental school doing dentistry.' "So what is the Fed supposed to do? If they could switch tools with Congress, I do not think that would be any better. Imagine the idiots in Congress with a chainsaw instead of precision tools! "I think the Fed has very few tools, and most of them are too similar, chainsaw vs. 10 foot buck saw. We can all sort of guess the result of using the various tools. The last time we had inflation this bad was 1980 give or take a few years. And [former Fed Chair Paul] Volcker used the one big tool (chainsaw) that he had. And it worked. It was not pain free. (I know from personal experience.) "But what other way is there to curb this level of inflation? Do any of you know of a historical precedent that worked without either high interest rates or recession? Does any Economic Theory hold promise? Not MMT, I mean a theory with some level of empiricism that shows it works. At least sometimes. (Even Keynes was right about the 1930s. Too bad politicians didn't/don't study/read the entire book.) "On the extreme side, there is the inflation in Germany which went on until they introduced New Money, the Rentenmark. And in Hungary in the late 1940s the Pengo disappeared with the introduction of the Forint. Then you have all sorts of inflation currently in Africa. In Egypt, based on current exchange rates and the ones when we lived there, it seems like they have had inflation over 5% on average for the past few decades! "The Fed right now has a much bigger problem than Volcker had. The national debt was in the 30% of GDP range then. Today it looks like it is over 100%. That either limits their options, and/or means the impact/damage of whatever they do is greater. I do not envy any of the folks in senior positions at the Fed." – Paid-up subscriber Heinrich E. All the best, Corey McLaughlin Baltimore, Maryland August 10, 2022 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst MSFT Microsoft 11/11/10 1,012.4% Retirement Millionaire Doc ADP Automatic Data 10/09/08 876.3% Extreme Value Ferris MSFT Microsoft 02/10/12 871.2% Stansberry's Investment Advisory Porter ETH/USD Ethereum 02/21/20 597.6% Stansberry Innovations Report Wade HSY Hershey 12/07/07 541.3% Stansberry's Investment Advisory Porter BRK.B Berkshire Hathaway 04/01/09 419.1% Retirement Millionaire Doc AFG American Financial 10/12/12 408.1% Stansberry's Investment Advisory Porter WRB W.R. Berkley 03/16/12 348.5% Stansberry's Investment Advisory Porter FSMEX Fidelity Sel Med 09/03/08 312.6% Retirement Millionaire Doc NTLA Intellia Therapeutics 12/19/19 297.4% Stansberry Innovations Report Engel Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio. --------------------------------------------------------------- Top 10 Totals 3 Retirement Millionaire Doc 1 Extreme Value Ferris 4 Stansberry's Investment Advisory Porter 2 Stansberry Innovations Report Engel/Wade --------------------------------------------------------------- Top 5 Crypto Capital Open Recommendations Top 5 highest-returning open positions in the Crypto Capital model portfolio Stock Buy Date Return Publication Analyst ETH/USD Ethereum 12/07/18 1,361.8% Crypto Capital Wade ONE-USD Harmony 12/16/19 1,234.9% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,072.3% Crypto Capital Wade MATIC/USD Polygon 02/25/21 861.7% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 516.4% Crypto Capital Wade Please note: Securities appearing in the Top 5 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the Crypto Capital model portfolio. The buy date reflects when the recommendation was made, and the return shows its performance since that date. To learn if it's still a recommended buy today, you must be a subscriber and refer to the most recent portfolio. --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Nvidia^* NVDA 5.96 years 1,466% Venture Tech. Lashmet Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Binance Coin crypto 1.78 years 963% Crypto Capital Wade Nvidia^* NVDA 4.12 years 777% Venture Tech. Lashmet Intellia Therapeutics NTLA 1.95 years 775% Amer. Moonshots Root Rite Aid 8.5% bond 4.97 years 773% True Income Williams ^ These gains occurred with a partial position in the respective stocks. * The two partial positions in Nvidia were part of a single recommendation. Editor Dave Lashmet closed the first leg of the position in November 2016 for a gain of about 108%. Then, he closed the second leg in July 2020 for a 777% return. And finally, in May 2022, he booked a 1,466% return on the final leg. Subscribers who followed his advice on Nvidia could've recorded a total weighted average gain of more than 600%. You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. 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