Brent crude is flirting with $90 a barrel again, up about 13% in a week, as markets weigh the gap between the White House’s desires and the military reality in the Strait of Hormuz. Stock futures are mixed as techno-optimism collides with macroeconomic angst. Investors are set to get fresh clues on the health of the AI build-out after the bell today, with reports from CoreWeave, Super Micro Computer and Lumentum.
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Bonds for the long run
On Wednesday, the U.S. government is expected to report that consumer prices rose by 3.4% in July from a year earlier, or by 2.5% for those of us who don’t use food or energy.
It’s easy to poke fun at government data or even to doubt its accuracy. However jaded Americans might be about CPI, though, Washington’s official numbers matter. Tax brackets, Social Security payments and retirement-account contribution limits are all pegged off of it.
So is a poorly understood corner of the Treasury market that’s looking interesting right now. The longest-term Treasury Inflation Protected Securities (TIPS) now yield nearly 3% in real terms. That’s higher than they’ve been in decades, and it’s also happening at an intriguing time.
Treasury interest rates are the traditional North Star for investors because they represent the risk-free rate—a bird in the hand versus what we hope will be two in the bush from more volatile stocks. Locking in a guaranteed 3%, inflation-adjusted return for almost 30 years still isn’t competitive with the 6.8% or so U.S. equities have averaged over similar spans, also adjusted for inflation.
But 3% is close to the worst-case historical return for stocks over decades of data. That three-decade stretch began 125 years ago and also came at a time of transformative technologies—cars, planes, electricity and radio. Maybe AI will surpass all of them combined, but we don’t know that.
The closest thing to a yield for stocks is what we pay today for a dollar of past earnings. Their returns over the coming years may well be on the lower end of historical norms if valuation measures such as Professor Robert Shiller’s cyclically-adjusted price/earnings ratio still have predictive value.
Based on inflation-adjusted earnings over the past decade, the Shiller P/E is in the highest few percentiles of historical observations. Stocks’ yield, which you get by flipping that ratio, is therefore near the lowest ever.
We also don’t know what future inflation will be. Stocks do give investors some protection if it’s higher than expected. Traditional bonds don’t, yet almost everyone owns them as part of a standard retirement portfolio.
Incorporating some long-term TIPS into that bond portion has rarely made more sense given worrisome inflation and unusually juicy yields. TIPS can be confusing in the way they impute income from inflation—a noncash taxable event that often surprises novice buyers. Exchange-traded funds make that simpler since they pay out those gains as dividends.
Of course TIPS also can trail standard bonds at inconvenient times, making them less of a portfolio buffer. They sharply lagged behind in 2008 when stocks also slumped and inflation got very low.
There are no guarantees in investing, but this is about as close as it gets to long-term peace of mind.
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Stocks I’m Watching
↘️ Intel: The chip maker increased the size of its stock offering to $20 billion, up from $15 billion announced previously. Shares ticked down slightly in premarket trading.
↘️ Trump Media & Technology: President Trump’s media business posted a 10-fold increase in losses in the second quarter in its earnings after Monday’s close, driven by declines in the valuation of its digital assets. Shares ticked down in premarket trading after shedding 8% yesterday.
↗️ Riot Platforms: Shares surged more than 22% in premarket trading following a Bloomberg report that the bitcoin miner secured a $9.1 billion cloud deal with Anthropic.
↘️ Rocket Lab: Shares in the rocket-launch company tumbled more than 8% premarket, falling despite reporting a narrower year-over-year loss and rising revenue.
🔎 On Holdings: The Swiss running-shoe maker is set to report earnings ahead of the opening bell.
🔎 Super Micro Computer, CoreWeave: Both AI infrastructure companies are set to report their earnings after markets close.
One Big Chart
Forget drug pipelines and clinical trials. These days, every healthcare trader has to be a part-time AI specialist just to keep up. That’s because what matters most to large-cap pharma and health insurance stocks right now is the momentum of the artificial-intelligence boom.
What I’m Reading
President Trump’s media company said more than 10 customers have signed up to a real-time feed of top Truth Social accounts, a product that has drawn criticism that the first family is mixing its business interests and White House affairs. (WSJ)Anthropic is racing to public markets this fall and has fielded tough investor questions on Chinese rivals, Trump-era tensions and AI infrastructure boom. (WSJ)The AI trade is stealing crypto’s thunder among short attention span investors. (WSJ)Say goodbye to tech’s “middle class.” A global memory chip shortage triggered by the AI boom is quietly squeezing budget phones and midrange laptops out of the market. (Monday Morning Economist)Hedge fund Situational Awareness, which saw its public portfolio shrivel last month, reflected not only deep conviction about the march of AI but confidence about when that would be reflected in markets. There’s a dark side to being so sure of a thesis. (Musings on Markets)
Today in Markets History
📰 On this day in 1928, accepting the Republican presidential nomination, Herbert Hoover declared: “We in America today are nearer to the final triumph over poverty than ever before in the history of any land.” Unfortunately, just over one year later, the Great Depression arrived, proving Hoover tragically wrong.
Beyond the Newsroom
WSJ | Buy Side: The Shokz OpenSwim Pro headphones work above and below the water.
About Me
Business and finance have fascinated me for a long time. Before writing this newsletter, I edited The Wall Street Journal’s Heard on the Street team for a decade, wrote two investment books and managed a team of stock analysts at a global investment bank.
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