Calm in Bonds Suggests a Stock Market Opportunity—But Watch Washington

Introduction

The recent behavior of the bond market has sent an intriguing message: hold your horses when it comes to stock investments. As President Trump embarks on his second term, investors need to pay attention to the shifting tides of government policies and economic indicators. Despite the uncertainty in the political landscape, opportunities abound for stock pickers willing to navigate this volatility.

Bond Market Signals Stability

Initially, the U.S. government bond market reacted poorly to Trump’s second term, leading to fears that the benchmark 10-year Treasury yield could hit 5%. Such high yields raise alarms not just for stocks but also for the overall U.S. economy, as higher long-term rates could deter investment. However, a curious twist saw yields ease back to approximately 4.5%, suggesting a more stable environment than appeared at first glance.

John Kornitzer, founder of Kornitzer Capital Management, aptly described the atmosphere as “in disarray,” with numerous issues looming such as tariffs, foreign aid, and oil policies. What does this mean for investors? It means picking and choosing stocks based on sound long-term investments remains a viable strategy. Kornitzer advises seizing opportunities as they arise, reinforcing the notion that a prudent approach can still yield gains despite headline volatility.

Data from Consumer Sentiment and Jobs Report

Recent economic data paints a mixed picture. A consumer sentiment survey pointed to rising inflation expectations, coinciding with January’s jobs report, which showed wage pressures intensifying as the unemployment rate dipped to 4%. Stocks faced downward pressure, particularly after Trump announced reciprocal tariffs on U.S. trading partners. While tariffs could potentially exacerbate inflation, evidenced by a new 10% tariff on China, the bond market seemed largely unfazed.

Inflation and Interest Rates: A Cautious Outlook

The specter of inflation looms large in the bond market, especially in light of the Federal Reserve’s rapid interest rate hikes in 2022. According to Matt Peron of Janus Henderson Investors, the market should remain cautious, but the recent decline in the 10-year Treasury yield—ending the week at 4.83%—suggests a more manageable interest rate environment. Peron believes that as long as yields remain stable, the market can handle the economic landscape.

However, investors should recognize the troubling potential of Trump’s policies contributing further to the U.S. budget deficit. Should the bond vigilantes react, fear of rising yields could escalate, significantly impacting borrowing costs for everyone from businesses to households and the government.

Strategic Moves for Investors

Despite the tumult, Treasury Secretary Scott Bessent’s recent actions signal a desire to prioritize stable 10-year yields over short-term rates. Following the Treasury’s quarterly refunding announcement, concerns about a significant increase in long-term debt issuance have diminished. Analysts like Guy LeBas from Janney Montgomery Scott are advocating for a stable interest-rate year ahead, while emphasizing the need for selectivity and high-quality investments.

In terms of stock strategy, Peron suggests the “GARP” model—growth at a reasonable price—seeming to indicate that while volatility may persist, the stock market has favorable conditions for investment. Despite worries in sectors like technology, which saw mixed performance, the broader economic backdrop shows promise. Positive earnings reports further bolster confidence, as about 62% of S&P 500 companies posted favorable fourth-quarter results, pushing growth rates up to 16.4%.

Conclusion: Keeping an Eye on Washington

As we venture deeper into 2025, the bond market’s recent calm signals a potentially fruitful environment for stocks, albeit with a watchful eye on Washington’s unfolding policies. Despite pullbacks in major indexes like the Dow Jones Industrial Average and S&P 500 at the week’s close, overall market resilience remains encouraging.

Investors should brace for some turbulence, particularly with upcoming Fed testimonies and key economic data, such as the consumer price index for January. In this climate, discernment remains key; fortify your position by investing in solid companies that promise long-term growth, while keeping an ear attuned to the headline news emanating from the capital.