Sell Into Any Strength… But Not These Stocks

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

Why we could see no rate cuts in 2025…
Inflation is edging higher, and the labor market is fine…
The worst fiscal situation since the Volcker years…
These stocks’ strength defies any rate environment…
A bonus way to trade seasonality…

The wild-card move for 2025…

Everyone and their dog is expecting the Fed to, at some point this year, continue cutting interest rates.

Yes, continue. It’s been so long since the September cuts that many people – including President Trump – are talking as if the Fed never started.

But I think there’s a significant chance we’ll see zero rate cuts in 2025.

And I’m well aware I’m in the vast minority on this line of thinking.

Am I crazy? Being contrarian for the sake of it?

I don’t think so.

Frankly, I think rates look to be right where they should be.

If anything, we could stomach them being a little higher… and that might even be a good thing.

Take a walk with me down crazy lane and you be the judge…

The Fed itself projects two interest-rate cuts of 25 points each this year. The President, meanwhile, wants 300 basis points. This is, of course, more Art of the Deal rhetoric – a 300-basis point cut all at once would be potentially just as disruptive as the Liberation Day tariffs.

It would invite higher rates of inflation, continue tarnishing the perception of U.S. Treasurys among foreign buyers, and just generally treat the world-reserve currency like a lotto ticket.

So, most certainly, Trump realistically wants something like a reduction of 1% in interest rates this year.

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Here’s the problem…

The Fed has two explicit reasons to ever let off the brakes of the U.S. economy. That’s the so-called “dual mandate,” which sets out the goal of stable prices and full employment.

We’re a long way gone from “stable prices” because we’ve accepted and in fact targeted a baseline loss of 2% of the dollar’s purchasing power every year. So, what we’re really looking for is “stability in the rate of loss in purchasing power.”

When we don’t get that, we raise rates. That’s why they are where they are now – money, creation, and government spending in 2021 drove prices broadly higher.

We are not at 2% inflation, not by a long shot. In fact, the Core Consumer Price Index edged up a bit over the last month, from an annual pace of 2.76% to 2.9%:

You may not think 2% is a reasonable target for inflation, and I would agree with you. We laid out the case some time ago that inflation has a new floor higher than the Fed’s target. And our own Jason Bodner has pointed out in the past that the historical average for inflation is actually around 2.5%.

But you and I and Jason are not the Fed, and the Fed wants 2%. So long as inflation is not at 2%, the argument for rapid rate cuts is kind of weak.

Plus, one can argue that the inflationary impacts of tariffs are still yet to be felt. In anticipation of tariffs, a lot of companies bought up supply ahead of the high duties. Those that didn’t, or those that are at such a scale that it’s impossible, simply ate the costs so they don’t have to immediately raise prices – a politically unfavorable move.

Walmart (WMT) is one such example – Trump publicly criticized the retailer for saying it would eventually need to raise prices. Walmart even warned that price changes will manifest slowly throughout the year… Everyone immediately forgot about that and celebrated the fact that inflation was not higher a mere three months into the (now extremely mitigated) tariff regime.

That’s one half of the dual mandate. Inflation is not where it needs to be, and pressures are to the upside.

The other half is “full employment.” And here we actually see less reason to cut – the job market is in generally pretty good shape. The hiring rate is slowing, but unemployment is near historic lows.

The job market is in no need of immediate support.

The real argument for cutting rates has to do with the implicit third mandate – keeping the federal government from bankrupting itself.

Here’s a chart of the government’s interest expense on its debt against GDP. It’s at the highest levels since the late ‘90s and dealing with the sharpest increase since the Volcker years of 1979 to 1987.

High government spending and high interest rates are a bad combination. The president, who just passed a pretty large stimulus package disguised as a tax package, would like to keep spending with a lower tax burden.

But the Fed, at least on its face, does not seem interested in meeting this need.

In all likelihood, we will see the federal funds rate slightly lower in 2025. As of today, traders are pricing in just a 7.1% chance of rates staying the same at the December meeting:

But that chance is quite a lot higher than it was just a month ago, when odds were at 1%.

My point is you shouldn’t be designing a portfolio right now based on lower interest rates. If we get any rate cuts at all, they’ll be pretty minor until Powell’s term as chair is up in May, at which point all bets are off.

Here’s how you should design a portfolio…

Every kid is expected to get straight A’s. OK, maybe a few B’s here and there. Even a C in a subject that doesn’t come naturally is acceptable.

But nobody wants to see a D or an F pretty much ever.

We hold these expectations because they’re a tangible measure of performance.

But if you had to go through your portfolio and grade each of your stocks, would you even know where to begin?

Set your gains aside. What kind of a grade does Nvidia (NVDA) get? And more importantly, what does that likely mean for its future performance?

Few investors ever bother to look critically at their portfolio in this way. But one investor, over the past 40 years, has made this calculating method of analysis the foundation of his approach.

Regular readers know I’m talking about Louis Navellier. He’s built and refined his Stock Grader system over the decades to quickly and easily determine the stocks worth owning.

Nvidia (NVDA) gets a B, according to Louis’s nine-factor grading model:

And following these grades pays off. As we showed you recently, Louis’ stock grades correlate strongly with performance – with A-rated stocks returning more than 25% over the 12 months ending May 31:

Owning these stocks is a great idea. And thankfully, anyone who subscribes to Louis’ work can grade their stocks in our portfolio analysis platform TradeSmith Finance at the click of a button.

But recently, we wondered how we could take it even further…

Lately, we’ve been talking a lot about seasonality here at TradeSmith. That’s because so far this year, it’s been a pretty crucial tool for navigating moves both in the broad markets and individual stocks.

Another big reason is that we partnered with Louis Navellier to combine his quantitative stock grading system with seasonality to create a brand-new strategy.

Our new Navellier Edge model portfolio gets you into his A-rated or B-rated stocks at their absolute best times of year. It’s a new bonus we launched for all the new Trade Cycles members joining after watching our CEO Keith Kaplan’s webinar about seasonality – which shows a major shift coming for the market this week.

Because this message is so timely, the webinar replay is only available through tomorrow. But you can still watch it here, get two free trade ideas, and the opportunity to access all our Trade Cycles perks, including the Navellier Edge portfolio.

Sell Into Any Strength… But Not These Stocks