 The FOMC is likelier to hike than cut rates in 2025 because the inflation trend is sideways, labor markets are healthy, and inflationary... ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ |
| | Written by Thomas Hughes 
The market continues to price in the chance for a rate cut in 2025, which could be a big mistake. Despite inflation’s fall from the COVID-induced highs, it remains hot and is not cooperating. Even if the January and February data are weaker than expected, the trend in inflation is flat, not downward, and does not align with the idea of lower interest rates. Other factors that point to higher interest rates are the labor markets, consumer spending, oil prices, GDP expectations, and the 10-year Treasury. This is a look at why. 
The Fed’s Mandates Are Not in Balance The Fed’s mandate is dual: support the economy while protecting the labor market and keeping interest rates low. The trend in inflation data is undeniable: it’s not cooperating, and the trend in labor data is one reason. The labor market has cooled from its peak in 2022/2023. Still, it remains healthy, strong, and resilient, with job gains averaging 191,000 in 2024, unemployment averaging 4%, wages rising by 4%, ample job availability, and historically low jobless claims. Some red flags include the Challenger, Gray, & Christmas data on layoffs and hiring plans and the total jobless claims data. Still, even they are better than they look at face value, revealing volatility within a shifting labor market environment and not deteriorating conditions. Consumer trends in 2024 are equally strong. They are expected to average over a 3% gain compared to the prior year. This is sufficient to outpace core consumer inflation growth relative to the PCE price index, showing a slight increase in demand. The forecast for 2025 is for retail sales to accelerate to 3.5% or higher, increasing upward pressure on prices, and tailwinds may develop in the back half as the Trump policy comes into effect. Coincidentally, the FOMC made note of the same fact at their last meeting. Oil Prices Rise: To Drive Inflation Gains in Q1 Oil prices compound inflation, impacting input costs at every system level. The oil price fell in 2024, hitting a long-term low in Q4, but has rebounded strongly. It was 17% off its lows in mid-January, indicated higher by price action and indicators, including moving averages, stochastics, and MACD. Trading near $78.25, the price of WTI aligns with the mid-point of a multiyear trading range with plenty of room to move higher. The takeaway is that oil prices will drive inflation in Q1 and potential for the year, assuming there is no price correction. 
The CME FedWatch Tool, a gauge of Fed probability based on futures contracts, still indicates a chance for cuts in 2025, but the odds are falling sharply. According to it, a cut is unlikely to happen before July, and one by the end of the year is questionable. At 75%, it won’t take much more to cement the idea of no cuts this year into the market’s mind, an event likely leading to a stock market correction. The good news is that an S&P 500 (NYSEARCA: SPY) correction is unlikely to lead to a sustained downturn because of underlying economic health, the cause of higher inflation. The 10-year Treasury Adjusts to a Higher-for-Longer-Than-Expected Environment The 10-year Treasury yield is rising and realigning with the evolving FOMC outlook. The yield advanced significantly in the year's first two weeks, rising to an 18-month high supported by the short-term 30-day and longer-term 150-day EMAs. The yield will likely continue rising because the spread at 4.8%, relative to the expected year-end 4% FOMC base rate, is well below the long-term average. In this environment, the yield could rise another 40 bps or more before topping out, and the Fed cutting to 4% is questionable. 
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| Written by Jeffrey Neal Johnson 
Market volatility has become a recurring theme lately, driven by multiple factors that contribute to investor uncertainty. These factors include persistent inflation, the ongoing conflict in Ukraine, and the unpredictable policy decisions of the recently elected Trump administration. During economic downturns, investors frequently turn to safe-haven assets, such as the gold and oil sectors, which are expected to maintain their value or appreciate in value. These commodities have historically been considered stores of value, and their appeal has grown considerably during these uncertain times. This surge in demand is reflected in the strong performance of exchange-traded funds (ETFs) like the SPDR Gold Shares (NYSEARCA: GLD) and the United States Oil Fund (NYSEARCA: USO), highlighting the growing appetite for assets perceived as stable during times of change. Gold: A Glimmer of Stability in Uncertain Times For centuries, gold has served as a store of value and a hedge against inflation and economic uncertainty. Its inherent scarcity, intrinsic value, and historical use as a form of currency have cemented its status as a safe haven. During past crises, such as the 2008 financial meltdown, gold often rallied as investors sought to protect their capital. Several factors are currently driving increased investor interest in the precious metal. Persistent inflation continues to erode the purchasing power of fiat currencies, making gold, which is not subject to the same inflationary pressures, an attractive alternative. Geopolitical risks, including the war in Ukraine and other international tensions, have further heightened gold's appeal as a haven from instability. The recent weakening of the US dollar against other major currencies has made gold more affordable for international investors, potentially boosting demand and prices. Finally, central bank policies, including interest rate decisions and quantitative easing measures, can also influence gold prices. Some central banks have been actively increasing their gold reserves, adding further support to the market. For investors looking to gain exposure to gold, the SPDR Gold Shares (GLD)ETF offers a convenient way to invest in the metal without the complexities of owning and storing physical gold. With an expense ratio of 0.40%, GLD holds physical gold bullion in the form of London Good Delivery bars, aiming to track the performance of the gold market. As of January 13, 2025, SPDR Gold Shares share price has seen a healthy 29.53% increase over the past year. Black Gold: The Oil Market's Rally Mirroring gold's volatility, oil prices have also experienced significant fluctuations, driven by a complex interplay of supply and demand factors. Supply constraints, exacerbated by reduced production from some major oil producers and heightened geopolitical tensions, have propelled oil prices upward. The stricter U.S. sanctions imposed on Russia have significantly impacted its oil exports, with analysts estimating a reduction of 700,000 to 800,000 barrels per day removed from the global market. These sanctions target key Russian oil entities like Gazprom Neft and Surgutneftegas, as well as a substantial portion of the "shadow fleet" of tankers used to circumvent restrictions. Beyond sanctions, other geopolitical factors, such as the potential for renewed sanctions on Iran under the Trump administration, further contribute to supply uncertainty. While supply concerns dominate the narrative, increasing global energy demand also plays a significant role. Factors like the continued economic recovery in China and persistent industrial activity in other developing nations fuel this growing demand. Meanwhile, speculative trading in the oil futures market can exacerbate price swings as traders react quickly to headlines and shifts in market sentiment. For investors seeking to capitalize on the oil market's dynamics, the United States Oil Fund (USO) offers an accessible way to participate without directly holding oil futures contracts. With an expense ratio of 0.70%, USO primarily invests in near-month crude oil futures contracts traded on the NYMEX but also invests in other oil types, such as diesel-heating oil, gasoline, and natural gas, depending on market conditions. It may also use other oil-related investments. United States Oil Fund’s strategy is to track the daily movements of West Texas Intermediate (WTI) crude oil. As of January 13, 2025, the United States Oil Fund’s share price boasts a one-year return of +20.89%, with a healthy +10.81% surge in the past month alone. GLD vs. USO: A Comparative Analysis GLD and USO both offer exposure to commodities often considered safe havens, but they take different investment approaches. GLD tracks the price of physical gold, giving investors direct exposure to the precious metal. USO, on the other hand, tracks the price of near-month crude oil futures contracts, which adds complexities and risks due to the futures market. USO's returns are influenced by the relationship between spot prices and futures prices (contango and backwardation), which can either boost or detract from its returns. USO has shown stronger year-to-date gains (8.84%) compared to GLD (1.49%). Over the past year, however, GLD has significantly outperformed USO, with a 29.53% return compared to USO's 20.89%. Both GLD and USO are exposed to market volatility, but USO carries additional risks due to the dynamics of the futures market. USO also has a higher expense ratio (0.70%) than GLD (0.40%), which can impact net returns over time. Investing for Uncertainty: A Balanced Perspective on Gold and Oil Gold and oil have historically been considered safe havens during times of economic instability. Market fluctuations have led investors to these commodities, which is reflected in the strong performance of most investment vehicles that track them. However, predicting future returns is complicated due to a multitude of influencing factors. These include inflation, geopolitical events, central bank policies, and supply-demand dynamics, all of which will ultimately shape gold and oil prices. Therefore, a balanced and diversified approach across a range of asset classes is essential for managing overall portfolio risk. A well-structured investment strategy should be aligned with individual risk tolerance, financial objectives, and your chosen time horizon. Read This Story Online | Did you miss out on the 1000%+ gains of Bitcoin over the past 5 years?
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| Written by Jeffrey Neal Johnson 
Archer Aviation (NYSE: ACHR), a leading developer of electric vertical takeoff and landing (eVTOL) aircraft, experienced a stock price decline of up to 9% on January 13, 2025. This downturn coincided with a broader market sell-off triggered by new U.S. restrictions on AI chip exports. Despite the short-term market turbulence, Archer continues to make significant strides in its pursuit of urban air mobility. The recent launch of Archer Defense, its dedicated military aircraft division, alongside a $430 million capital raise and exploration of aggressive stock buybacks, signals a proactive growth strategy. With ongoing progress toward FAA certification and key partnerships in place, this dip in Archer's stock price may present a compelling bargain-priced entry point for investors seeking long-term growth potential in the eVTOL sector. Near-Term Turbulence, Focused on Long-Term Flight Archer Aviation's stock price pullback reflected broader market anxieties related to U.S. restrictions on AI chip exports. This downturn was a continuation of a downturn started by insider selling activity by CTO Thomas Paul Muniz, who sold $600,000 worth of stock on January 7, 2025. Two days later, on January 10, JP Morgan (NYSE: JPM) adjusted its rating on Archer to "Neutral" while raising its price target to $9 from $6 which was below the trading price of $11.50 reached the week before. This shift, despite the increased price target, signals a more cautious near-term outlook based on the stock's rapid price appreciation in recent months. Current short interest, at 24.6% of the free float (a two-week high), reflects continued bearish sentiment among some investors. However, recent bullish options activity suggests that confident large investors anticipate a rebound and significant price appreciation. This divergence in market sentiment highlights the uncertainty surrounding Archer's short-term trajectory. While Archer Aviation faces challenges due to broader market trends and investor sentiment, it's crucial to acknowledge the company's substantial advancements in key areas. The ongoing development of the Midnight aircraft, coupled with the active pursuit of commercial and military contracts, demonstrates significant progress. These factors, combined with Archer's strong financial standing, provide a more balanced picture that extends beyond the immediate market pressures. It is essential to consider the short-term challenges and the long-term potential when evaluating Archer Aviation's overall position. Balancing Near-Term Volatility with Long-Term Potential Archer Aviation is strategically positioning itself for growth in the commercial and military eVTOL sectors. Its flagship eVTOL aircraft, Midnight, designed for urban air mobility, has already garnered substantial orders from United Airlines (NASDAQ: UAL), totaling up to $1.5 billion. The company's high-volume manufacturing facility in Covington, GA, is on track for production commencing in early 2025, following FAA-type certification. Simultaneously, Archer Defense, the company's military division, is collaborating with Anduril Industries to develop a hybrid VTOL aircraft targeted at a specific DOD program. As of the third quarter of 2024, Archer Aviation held a strong cash position of $501.7 million, though the company has yet to generate revenue. Significant investments in research and development resulted in a net loss and negative EBITDA for the quarter. However, a debt-to-equity ratio of 0.16 suggests a healthy balance sheet. As of January 13, 2025, Archer had a quick ratio and current ratio of 6.03, further indicating its ability to manage short-term liabilities. The recent $430 million equity financing, which raises total funding to nearly $2 billion, bolsters Archer's financial outlook. This capital infusion will support Archer Defense initiatives, ongoing aircraft development, regulatory approvals, and scaled production at the Covington facility. In collaboration with Stellantis (NYSE: STLA), Archer aims to reach an annual production capacity of 650 aircraft by 2030. Soaring Ambitions, Grounded Risks Investing in Archer Aviation carries inherent risks that warrant careful evaluation. The eVTOL industry is in its early stages and faces substantial regulatory hurdles, most notably the FAA certification process. While Archer reached a key regulatory milestone with the finalized SFAR in late 2024 and aims for full certification by late 2025, the process is complex, and delays or unforeseen challenges could significantly impact commercialization timelines. Furthermore, competition within the eVTOL sector is intensifying, with companies like Joby Aviation (NYSE: JOBY) vying for market dominance. To succeed, Archer must effectively differentiate its Midnight aircraft and forge a strong market presence. Archer Defense's success hinges on winning and executing military contracts. The defense sector is notoriously competitive, with many established players and rigorous bidding processes. While the partnership with Anduril is a strategic advantage, the outcome of the targeted DOD program and the ultimate scale of military contracts remain uncertain. Archer, like many pre-revenue companies, also faces financial risks. Continued investment in research, development, and scaling of production will require substantial capital. While the $430 million equity raise extends Archer's financial runway, investors should carefully monitor the company's burn rate and assess the potential need for future funding rounds. Finally, macroeconomic conditions and geopolitical events, such as the recent restrictions on AI chip exports, can significantly influence investor sentiment and Archer's stock performance. These broader market factors further complicate the company's investment potential. Military Might, Urban Mobility, Discount Price Despite recent market turbulence that has driven down Archer Aviation's stock price, creating what some analysts view as a bargain, the company remains positioned for substantial long-term growth in the eVTOL sector. Archer's strategic expansion into the defense market with Archer Defense, alongside its continued progress toward commercialization with the Midnight aircraft, provides a diversified approach to revenue generation. The company’s nearly $2 billion in funding, bolstered by the recent $430 million capital raise, directly addresses the financial risks associated with pre-revenue companies, providing ample runway to execute its strategic vision. Strong partnerships with established players like Stellantis and United Airlines further de-risk Archer’s ambitious growth strategy. While challenges remain in this early-stage sector, Archer Aviation offers investors a compelling opportunity to participate in the future of urban air mobility and military aviation. Investors with a long-term horizon and an appetite for calculated risk are encouraged to conduct further research and assess Archer Aviation's potential within their investment portfolios. Read This Story Online | |
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