Just four weeks ago, the 10-year Treasury bond dipped to a 3.62% yield on September 17th. The stock market is now digesting a 50-basis-point rise to 4.12% on the 10-year Treasury bond yield last week, making holders of many interest rate-sensitive stocks nervous. This dramatic increase in Treasury bond yields could adversely impact insurance companies, utilities, and other interest rate-sensitive stocks.
I should add that Hurricane Milton also weighed on many insurance companies since it was expected to cause significant damage in parts of Florida that were already saturated by excessive rainfall. However, Florida Governor Ron DeSantis said that a “worst case scenario” was avoided, and it appears that much of Florida was not as hard hit by Hurricane Milton as was initially feared, even though flooding risk remains high, and Siesta Key, Sarasota, and the Tampa baseball stadium sustained severe damage.
Even after two hurricanes and large interest rate increases, the Dow Industrials and S&P 500 hit new all-time highs last Friday as Americans remain resilient and anticipate a quick resolution of election uncertainty.
Here are the most important market news items and what this news means:
- The U.S. is installing and operating a high-altitude missile defense system (the Terminal High Altitude Area Defense system or THAAD) in Israel. The THAAD system is meant to intercept long-range ballistic missiles from Iran. It is now widely perceived that when Israel retaliates against Iran it will only be against military targets and that crude oil infrastructure will be spared. As a result, Iran’s crude oil exports of up to one million barrels per day are expected to continue, so crude oil prices are now declining as the war risk diminishes.
- A 4.6 magnitude earthquake in Aradan in Northern Iran this past weekend has raised speculation that a nuclear test may have been conducted. As a result, the probability that Israel will hit Iran’s nuclear sites is now rising.
- The semiconductor industry had its own tremors on Tuesday after ASML lowered its guidance for 2025 total net sales to between 30 billion euros and 35 billion euros, compared to its previous guidance of up to 40 billion euros. ASML didn’t give a detailed explanation of why its bookings fell so short of estimates, beyond a few delays in plant constructions. Fortunately, ASML will hold a call with investors on Wednesday to clarify why it lowered its sales guidance.
- China’s exports rose 2.4% in September, which represents the sixth straight month of rising exports. That was the good news. The bad news is export growth decelerated from an 8.7% pace in August. Economists were expecting Chinese exports to grow at a 6% annual pace in September, so the deceleration was much sharper than anticipated. The European Union tariffs on Chinese-made electric vehicles (EVs) may be finally adversely impacting Chinese exports. Nonetheless, concerns about China’s economic growth persist, regardless of all the economic incentives that China has implemented.
- Microsoft Azure Chief Technology Officer, Mark Russinovich, said data centers that make generative AI products like ChatGPT possibly will soon reach size limits, effectively necessitating a new method of connecting multiple data centers together for future generations of the technology. The most advanced AI models today need to be trained inside a single building where tens (and soon hundreds) of thousands of AI processors, such as Nvidia’s H100s /or Blackwell GPUs, can be connected so they act as one computer. However, as Microsoft and its cloud computing competitors strive to build the world’s most powerful AI models, several factors, including limited energy grids, will create a de facto cap on the size of a single data center, which is anticipated to consume multiple gigawatts of power or the equivalent to hundreds of thousands of homes. No wonder Microsoft got Constellation Energy to reactivate a nuclear reactor on Three Mile Island. So as the AI arms race continues, insane power demands are now unfolding, so it appears the U.S. electricity grid will have to double and big natural gas electric plants with turbines the size of trains will have to be permitted if hydroelectric and nuclear power cannot meet the needs of the cloud computing industry.
- California is apparently in the midst of “Trump-Proofing” its climate policies, according to The New York Times. Gavin Newson is trying to get communities to abandon natural gas hookups, so they go all-electric in homes. Specifically, California Senate Bill 1221 will provide electric appliances to residents at no cost if their communities abandon natural gas. Obviously, California is proceeding to curtail natural gas use despite losing multiple battles in federal courts. Frankly, I think these efforts to eliminate natural gas appliances are futile since there is nothing better than sitting by a natural gas fire pit on the California coast as the fog rolls in, which is why the Lodge at Pebble Beach has many firepits at its outdoor restaurant.
Overall, I remain optimistic due to the fact that the money supply, based on M2 (cash and savings accounts, excluding retirement accounts and CDs above $100,000) has surged in recent months. The stock market is very correlated to M2, so as the money supply surges, the stock market has historically risen impressively. With economic uncertainty diminishing (as the Fed continues to cut key interest rates) and political uncertainty diminishing (due to the Presidential election), the stock market is poised to rally, provided that World War III does not materialize.
