Another tragedy in Minnesota, followed by snowmageddon across half of the country. Once again it is hard to focus on the details of the economy, but I’ll try. I hope you are all as well as can be expected, and that your power is restored soon.
It is Fed week again, when the Federal Reserve’s Open Market Committee decides if it will change the Fed-funds interest rate. The current rate is 3.50% to 3.75%. Nobody much thinks that another cut is coming in January after three cuts in the fourth quarter of 2025, but we’ll be watching anyway. Interestingly, the yield on the ten-year Treasury Note is RISING. As you know, yields on sovereign debt are determined by the auctions at which the debt is sold. And buyers are now demanding higher yields in order to invest.
Why? The U.S. government carries a very large debt and is no longer rated AAA, therefore it has to offer a better deal to lure buyers away from other countries’ better-rated debt. In the past year, $2.25 trillion has been added to our national debt. Also – the Trump Administration is roiling international waters with talk of annexing Greenland, new tariffs on allies, and government meddling in Venezuela. It’s hard to know where to look.
Precious metals are soaring in price because they are a safe-haven asset. Gold closed above $5,000 per ounce at the end of last week for the first time, while silver prices rose above $100 per ounce, also a record. Analysts at Business Insider say that the price move in gold “reflects growing fears over high government debt. Investors are piling into hard assets in the so-called ‘debasement trade,’ driven by fears that heavy government borrowing will steadily erode the value of money.”
And the dollar is weaker, too. It is currently worth 0.85 euros, or, in other words, one euro is worth $1.19. Foreign investors convert their currency to dollars in order to buy American government bonds. As demand for bonds decreases, the dollar itself weakens.
We have now had two straight weeks of losses in the stock markets, but of course not all stocks are falling. Small capitalization stocks, as reflected by the Russell 2000 Index, beat the large-cap S&P 500 over the past 14 days. According to the Wall Street Journal, “Small-cap stocks tend to outperform in market environments like the current one, in which investors are optimistic about economic growth. So far in January, the Russell has peeled off eight closing records and gained 9.5%, more than nine times the gain of the S&P and Nasdaq composite.”
Another factor weighing on American stocks and bonds is the recent spike in the Treasury yields of Japan. Their ten-year yield is currently around 2.25% – up from less than 1.25% one year ago. This is worrisome given that the Japanese carry a bigger debt as a percentage of GDP than even the U.S. does, and as rates rise, so do their interest payments on that debt. More people buying Japanese bonds would send yields down (prices and yields move in opposite directions), but will that happen? Will the Japanese be forced to print money to pay debts – an inflationary scenario?
31.7% of America’s wealth was controlled by the top 1% of households in the third quarter, according to the Wall Street Journal. That’s almost as much as the bottom 90% combined. Furthermore, the top 20% of earners account for 59% of consumer spending, per CNN. This is the K-shaped economy, where the upper strata are doing great and the lower ones are struggling. This is unsustainable and is likely to lead to tax hikes once a responsible Congress is elected.
Senate Democrats, in the wake of the latest ICE killing, are now promising to vote against a budget bill that increases spending for ICE. Given that a government shutdown is scheduled for Friday at midnight unless the budget bills (there are six of them) are passed, odds of a government shutdown have thus increased from around 10% to near 80% on Polymarket.
Tax season officially opens today, with the IRS accepting 2025 tax returns now through April 15th. Some changes in the tax code have taken effect, so please check with your accountant.
For the week ending on January 23rd, the Standard & Poor’s 500 closed at 6,915, the Dow Jones Industrial Average at 49.098, and the Nasdaq Composite Index at 23,501. The yield on the ten-year Treasury Note finished at 4.239%. U.S. crude oil cost $60.67 per barrel – slightly higher this week. N.Y. gold cost $5,089.80 per ounce – near its recent record high. One Euro was worth $1.19.
Elizabeth E. Cook
Partner, Diastole Wealth Management
News and information presented here was gathered from sources believed, but not guaranteed, to be reliable, including (but not limited to) Yahoo Finance, Barron’s, The Sevens Report, The Wall Street Journal, Reuters, Bloomberg, CNBC, USA Today, CNN, MarketWatch, Fortune, Bloomberg Business Week, Business Insider, Axios, and The AP. If you have questions, please call Diastole at 203.458.5220 or email ecook@dwinvest.com to reach me, Liz Cook.
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