Market Correction 2025: Dollar, Yields, Yield Curve, and Trump

The factors that nobody is talking about.

Jan 9, 2025

Why Markets Are Doing the Cha-Cha-Cha the last few days: A 6-Point Dance-Off with a Twist

Hey there, savvy investors and curious cats of the financial world! We watch in the Wall-street movies quotes like : when the music stops the dance is over and stuff like that…so…Let's dive into the whirlwind of market movements with a rhythm of our own:

The Mighty Dollar's Tango: Picture this: the U.S. dollar, flexing its muscles on the global stage, decides to take the lead in the dance. Its strength has everyone from multinationals to mom-and-pop shops doing the tango, feeling the squeeze as their overseas earnings shrink when converted back home. This dance move is definitely contributing to the current market correction.

The 10-Year Note's Salsa: Oh, the drama! The 10-year U.S. Treasury note has been salsa dancing with yields, shaking up the party by rising unexpectedly. With each step, it's making stocks less appealing, as investors eye those juicy bond returns, leading to a bit of a market shuffle. Higher yields mean higher borrowing costs, and suddenly, the dance floor feels a bit crowded.

The Yield Curve's Waltz: Here comes the most elegant dance of all, the yield curve's waltz between the 10-year and 3-year notes. Normally, they glide gracefully with long-term yields leading. But oh, when they nearly step on each other's toes, or worse, switch places (inversion!), it's a sign the music might be slowing down. Recently, we've seen this dance move from discord to a bit more harmony, signaling market adjustments and corrections.

Trump's Tariff Boogie: Enter Donald Trump, the wild card DJ spinning the tariff track. Deregulations sound great but his threats of hefty tariffs have everyone on the dance floor worried about inflation. Tariffs can make goods pricier, and with Trump's unpredictability, investors are doing the boogie of uncertainty, wondering if their wallets will keep up with the new beat.

Global Economic Jive: It's not just the U.S. doing all the dancing. The global economy, with China's economic health playing a pivotal role, has everyone jiving to a less upbeat tune. Commodity prices and consumer behavior globally are like the rhythm section, setting the pace for how fast or slow the market dance goes.

Investor Sentiment's Hip-Hop: Last but not least, the vibe of the dance floor is all about investor sentiment. When the music of optimism plays, everyone's dancing. But with the 10-year yield's moves, the dollar's strength, and the tariff boogie, there's a beat of caution, leading to a market correction as investors adjust their moves, stepping back or changing partners (from stocks to bonds).

In conclusion, while the market dances to the tune of Trump's deregulation and tax cuts, remember Stan Druckenmiller's wisdom: "Sometimes obvious is obviously wrong.”

So, keep your feet grounded and your eyes sharp on these market dance moves. Stay strong, keep your balance, and you'll last through this dance marathon.

Until next time

TKR