January 2025 Market Update

2025, a year of common sense, new leadership, and fresh ideas. The inauguration of the Trump administration fuels excitement for the American economy.

Much change has occurred at the beginning of the year. As 2024 turned into 2025, and the Biden administration was replaced with the Trump administration, the Federal Reserve turned from doves into hawks. After cutting interest rates 100 basis points since September, down from 5.25% to 4.25%, the Fed has decided to pause. With Inflation down to 2.9% and unemployment declining from a peak of 4.3% down to 4.1%, the Fed sees no reason to continue cutting interest rates.

A concern not many are discussing is why the 10-year risk-free interest rate has risen, causing 30-year mortgage rates to rise since the Fed began cutting interest rates in September 2024. Mortgage rates have risen from 6.1% to 7.1%, providing the undesired effect of lowering home affordability. This is an alarming outcome and begs to question if something is wrong inside the financial system. As new economic policies are enacted to help fix America’s fundamental problems, uncertainty is on the rise.

The market is becoming increasingly concerned over the continued rise in 10-to-30-year interest rates since the Fed has cut the federal funds rate. Over the past few years, two things have become increasingly evident, the economy is dependent on government spending, and a small portion of corporations in the S&P 500 make up the majority of corporate profits. The big tech companies in America are basically running a monopoly with which government spending and a lack of antitrust lawsuits have helped to support. This is why S&P 500 earnings continue to rise, despite very little growth, if any, coming from the bottom 490 stocks. Because on the surface corporate earnings growth looks great, interest rates, real estate, stocks, gold, and bitcoin all continue to remain high.

The government’s focus, particularly the U.S. Treasury, is on spending, but more importantly, on borrowing costs and refinancing rates. If interest rates remain high because S&P 500 earnings growth remains robust due to the continued existence of the big tech monopoly, this could prove detrimental to long-term average GDP growth. It is not in America’s best interest to run a narrow economy which only works for a handful of corporations. For these reasons we believe the Trump administration will act to end the internet monopoly, which should increase competition, bring down prices and interest rates. To do this, in the near term the government will need to find new tax revenue from sources other than domestic corporate profits. This is where tariffs come in and hopefully act to encourage an increase in tax revenue through a large increase in foreign direct investment.

The Trump administration will decide tomorrow, February 1st, on tariffs for Canada, Mexico and China. While tariffs have quickly become a new focus of market uncertainty, they are being used for negotiating a lower exchange rate in an environment where interest rates are too high, and Americans cannot afford more inflation. The point of the tariff threat is to encourage foreign direct investment into the United States, so that in the event of a weaker economy, which requires the Fed to cut interest rates, inflation and risk-free interest rates won’t rise while the dollar declines due to a negative net national savings position. The purpose is to protect purchasing power while convincing foreign countries to strengthen their own currencies, build factories and make products in the United States, which would help rebuild U.S. net national savings.

We believe the policies the Trump administration is enacting will lead to economic growth and American prosperity, over time. The proposed solutions are fundamental in nature and point to structural reform. However, these plans will not be implemented without pushbacks. Change is scary for most people, especially a corrupt government, and change does not always go smoothly even though in the long run it's for the best. From an economic standpoint we know that America cannot achieve long term gain without short term pain. Cutting government spending, threatening tariffs, increasing foreign direct investment, incentivizing childbirth, strengthening the military, reforming food, medicine, and the FDA, will disrupt the current economic system.

Our greatest concern through this disruption/transition is America’s negative net national savings position. America is in a position where many believe the policy choices of the recent past will work in the future. But what if they do not? 

What if the 10-year risk-free interest rate is rising since the Fed began cutting in September because there are no savings left in the event of a U.S. economic downturn and this is the beginning of a debt spiral, because the bond market foresees stimulus, rate cuts & liquidity as the likely policy responses to support corporate earnings and the labor market, and the bond market knows it’s not a sustainable solution?

Many market participants believe 10-year risk-free interest rates are rising because rate cuts have been priced out, but we believe it is more complex than that. And if correct, America is about to enter a new economic reality where growth is lower for longer and average borrowing and refinancing rates are higher than expected. This new reality could really hurt the passive stock market, its long-term growth rate and everyone’s lofty expectations about Trumps 2.0 economy. The U.S. economy is stuck in a liquidity trap, if it is purged rather than extended, the current Wall Street, “economy is great” narratives, could disappear quickly.

In time, if the Trump administration is successful with ending the internet monopoly, reducing inflation and interest rates, attracting foreign direct investment, replenishing national savings, and increasing birthrates, then a stronger and much broader economy should emerge on other the side of what at times may feel like a scary economic transition.

The Trump administration takes the reigns of the economy with GDP growth 2.6%, inflation 2.9%, federal funds rate 4.25%, 10-year risk-free rate 4.5%, 30-year mortgage rates 7.1%, home affordability at an all-time low, corporate profits at an all-time high, and the S&P 500 CAPE ratio, cyclically adjusted price-to-earnings at 38x. The long-term average is 17x, 55% below the current level.

The economy is not in great shape despite what the media and Wall Street portray. New tenant repeat rents, which are a lead on inflation, are -2.4% while the job hiring rate of 3.6% is at its lowest level in a decade. It's hard to get a job if you do not already have one. In addition, U.S. homelessness has risen 33% since 2020.

As President Trump has stated, "interest rates are far too high". The President knows the working economy is weak, as the truth comes out regarding the true state of the labor market, illegal immigration comes to a halt and government spending is cut, the economy will likely face a growth scare, and the Fed may end up cutting interest rates much more than they currently think they will.

Our recommendation since January of 2023 has been to position portfolios to endure a recession, in a defensive manor, risk off and in cash, T-bills, money market funds, fixed income duration extended in September 2023 from 0-5 year to 0-30-year U.S. Treasury bills and notes, 10-year minus 2-year yield curve re-steepening, 10-year minus 3-month yield curve re-steepening added September 2024, Short USDJPY from 153, and select low duration U.S. equities.

Getting paid to wait for growth assets to be priced at discounts, while being positioned to benefit from bond price appreciation as interest rates decline from downward economic pressure, continues to be a profitable and rewarding strategy. We remain patient and focused on managing risk through 2025.

Disclosure: Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results. This letter is not intended to be relied upon as forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Macrovex Capital, LLC to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projection, and forecasts. There is no guarantee that any forecast made will materialize. Reliance upon the information in this letter is at the sole discretion of the reader. Please consult with a Macrovex Capital, LLC financial advisor to ensure that any contemplated transaction in any securities or investment strategy aligns with your overall investment goals, objectives, and tolerance for risk. Additional information about Macrovex Capital, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD #300692. Macrovex Capital, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice