Markets End the Biden Era With a Roar. But Inflation Isn't Dead. — Barrons.com

By Randall W. Forsyth

Talk about ironic. The stock market closed out the Biden administration with the best week since Donald Trump's triumphant re-election in November. But equities' gains this past week reflected mainly a relief rally in the bond market after some inflation reports were better than expected, which isn't the same as good.

The S&P 500 index gained 2.91% to just short of the 6000 mark, its best percentage gain since the week of Election Day ended on Nov. 8. The Nasdaq Composite added 2.45% while the Dow Jones Industrial Average popped 3.69%, with all three major gauges ending a two-week losing streak. Stocks followed a 16.1 basis-point drop in the yield on the benchmark 10-year Treasury note, to 4.61%, the largest decline since the week ended on Nov. 29. (A basis point is a hundredth of a percentage point.) The yield decline translated into a 2.02% advance in the iShares 20+ Year Treasury Bond exchange-traded fund, better known by its ticker symbol, TLT.

Despite the strong equity and bond performance in his final week, Joe Biden's term ends with a decidedly mixed record, according to stats distilled by Larry Adam, Raymond James' chief investment officer. The S&P 500's price return of 55% over the four years was the fourth best of any president since World War II. Economic growth also was the fourth best in that span, some 15.5%, or 3.7% annually.

And while 17 million jobs were added during Biden's term, consumer prices rose 20%, or 4.9% compounded annually. As a result, consumers' real disposable income fell by a cumulative 3%, the only decline of any president in the past 50 years, which goes a long way to explains why Biden ends his presidency with the lowest approval rating, 37%, in history. And that record came as the national debt exploded by $8 trillion, to $36 trillion, surpassing the size of the U.S. economy.

For the week just ended, however, better-than-expected inflation releases sparked a bond rally, albeit from a yield of 4.80%, the highest since October 2023. High yields equal low bond prices, which were reflected in negative market sentiment, according to a research note from Evercore ISI's strategy team led by Julian Emmanuel. Treasury yields have been a key variable for stocks, they write; a rise above 4.5% on the 10-year note poses a "surmountable headwind," while 4.75% would point to a "deeper correction" and 5% to a " bull market threat."

While bonds rallied in reaction to the December consumer price index, which rose 0.2% (excluding food and energy costs) instead of the 0.3% forecast by economists, this better-than-expected report doesn't equal better inflation news, according to John Ryding and Conrad DeQuadros, economic advisors for Brean Capital. In actuality, the so-called core inflation year-over-year trend has stalled at about 3.2% or 3.3% in the second half of 2024.

At the same time, crude oil futures surged 12.1% in the past four weeks while unleaded gasoline futures were up 8.8%. While higher prices haven't shown up at the pump, higher energy prices may become more problematic for inflation.

Federal Reserve Gov. Christopher Waller expressed optimism this past week that if inflation makes progress toward the central bank's 2% target, multiple rate cuts could be forthcoming this year. Federal-funds futures price in only a single, quarter-point reduction in the second half of 2025, according to the CME FedWatch site.

Waller was early in expressing confidence in November 2023 that the Fed "could start lowering the policy rate," according to a client note on Friday from Macro Intelligence2 Partners. What followed then, however, was a "massive surge in risk assets, a few sticky inflation prints and strong data prints," and no rate cuts for another nine months.

Real gross domestic product growth now appears to be accelerating to a 3% pace, measured on a fourth-quarter-to-fourth-quarter basis, write Steven Ricchiuto and Alex Pelle for Mizuho Securities. "The price of this growth, however, is 3%, not 2%, inflation, they add.

The market needs to take the risk of sustained 3% inflation seriously, the Mizuho economists contend. That argues for the long-term Treasury rates to breach the 5% resistance level.

Fiscal policy, already stimulative, is expected to become more so under the Trump administration, they add. To attract votes from the other side of the aisle, the Trump team may need to add expanded state-and-local tax, or SALT, deductions and more disaster payments for the California wildfires.

The Mizuho economists conclude that the political reality is that legislation to extend the Tax Cuts and Jobs Act of 2017 will be much more generous than currently anticipated. Fed policy is net stimulative after last year's rate cuts. After the latest week's respite, the stock market would probably have to deal with a resumed uptrend in bond yields.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

By Luis Garcia

Flowco Holdings' successful $427.2 million initial public offering might not necessarily augur a resurgence in oil-field services IPOs, according to energy bankers.

Houston-based Flowco saw its share price jump about 24% in its trading debut Thursday at the New York Stock Exchange. The first-day pop sent the company's valuation to some $2.6 billion and marked the largest IPO of an energy company by money raised in nearly six years, according to research provider Renaissance Capital.

But energy bankers say the success is likely tied more to the unique combination of services Flowco offers than to a recovery in stock investor appetite for the sector.

Oil-field-services investors Global Energy Capital and White Deer Energy formed the business last year by combining three portfolio companies to pave the way toward an IPO. The private-equity firms own a roughly 65% combined stake in Flowco following the IPO, said Joe Bob Edwards, Flowco's chief executive and a former managing partner at White Deer.

"It's been about a six-month journey from that date to today," said Edwards. "We targeted a January listing and we made it."

Flowco provides artificial-lifting services that use mechanical systems or inject natural gas into wells to help extract the heavier oil. It also supplies vapor-recovery units that capture methane released by crude or natural gas on their way to pipelines.

Such services meet the needs of profit-driven oil producers seeking to make the most of their existing wells, said Brian Williams, a managing partner at investment bank Carl Marks & Co. who also previously led oil-field-services companies. Flowco's methane-abatement services, in turn, enable those producers to profit from the sale of captured methane while complying with regulations that forbid flaring of natural gas at oil fields, he said. This combination of services makes Flowco more attractive to investors who might be reluctant to back fossil fuel-related businesses, according to Williams. Indeed, Flowco in pre-IPO regulatory filings highlighted the "economic and environmental benefits" of its services.

"They aren't saying, 'Look, we're going to drill and frack a bunch of wells and we're going to grab market share,'" Williams said. "It's more like, 'We're going to optimize production using technology and clever equipment and we've got this way to capture the methane.'"

Public investors' appetite for oil-field-services providers remains low, he said, citing those businesses' much lower market-value-to-earnings ratios compared with other types of companies in the S&P 500 stock index. It is a sign that the outcome of Flowco's IPO was more "about the company than the industry," he added.

"I think the IPO was well thought through, well-timed and well-priced, with Flowco having a production and technology orientation more so than other oil-field names," Williams said. "I don't know if you could have an IPO of a land-drilling-services company right now."

The new Trump administration plans to make it easier for oil companies to drill wells offshore and in federal land, while relaxing tailpipe emission rules, all part of an effort to boost the U.S. oil-and-gas industry, The Wall Street Journal has reported. Energy fund managers, however, said oil companies are unlikely to revert to their old, cash-burning strategies of growth at any cost.

Edwards said that while government support for the industry is welcome, he hopes that "any kind of political involvement stays at a minimum."

"These businesses have been around for over 10 years and have been successful through multiple administrations," he said of the companies that formed Flowco.

Flowco has the ability to expand even if U.S. oil production doesn't, as producing wells requires enhancing services along their entire lifetimes to slow declines in output, Edwards added.

Williams said that if drilling activity decreases too much and for too long, "eventually the production that Flowco gets to service diminishes." As with all other oil-and-gas businesses, Flowco's fortunes will depend on the future need for fossil fuels, he said.

"It's not sleight of hand but, at the end, we're all tied to the price and demand for oil and natural gas," he said. "Those are trends that nobody in the industry can control."

Write to Luis Garcia at luis.garcia@wsj.com

By Luis Garcia

Flowco Holdings' successful $427.2 million initial public offering might not necessarily augur a resurgence in oil-field services IPOs, according to energy bankers.

Houston-based Flowco saw its share price jump about 24% in its trading debut Thursday at the New York Stock Exchange. The first-day pop sent the company's valuation to some $2.6 billion and marked the largest IPO of an energy company by money raised in nearly six years, according to research provider Renaissance Capital.

But energy bankers say the success is likely tied more to the unique combination of services Flowco offers than to a recovery in stock investor appetite for the sector.

Oil-field-services investors Global Energy Capital and White Deer Energy formed the business last year by combining three portfolio companies to pave the way toward an IPO. The private-equity firms own a roughly 65% combined stake in Flowco following the IPO, said Joe Bob Edwards, Flowco's chief executive and a former managing partner at White Deer.

"It's been about a six-month journey from that date to today," said Edwards. "We targeted a January listing and we made it."

Flowco provides artificial-lifting services that use mechanical systems or inject natural gas into wells to help extract the heavier oil. It also supplies vapor-recovery units that capture methane released by crude or natural gas on their way to pipelines.

Such services meet the needs of profit-driven oil producers seeking to make the most of their existing wells, said Brian Williams, a managing partner at investment bank Carl Marks & Co. who also previously led oil-field-services companies. Flowco's methane-abatement services, in turn, enable those producers to profit from the sale of captured methane while complying with regulations that forbid flaring of natural gas at oil fields, he said. This combination of services makes Flowco more attractive to investors who might be reluctant to back fossil fuel-related businesses, according to Williams. Indeed, Flowco in pre-IPO regulatory filings highlighted the "economic and environmental benefits" of its services.

"They aren't saying, 'Look, we're going to drill and frack a bunch of wells and we're going to grab market share,'" Williams said. "It's more like, 'We're going to optimize production using technology and clever equipment and we've got this way to capture the methane.'"

Public investors' appetite for oil-field-services providers remains low, he said, citing those businesses' much lower market-value-to-earnings ratios compared with other types of companies in the S&P 500 stock index. It is a sign that the outcome of Flowco's IPO was more "about the company than the industry," he added.

"I think the IPO was well thought through, well-timed and well-priced, with Flowco having a production and technology orientation more so than other oil-field names," Williams said. "I don't know if you could have an IPO of a land-drilling-services company right now."

The new Trump administration plans to make it easier for oil companies to drill wells offshore and in federal land, while relaxing tailpipe emission rules, all part of an effort to boost the U.S. oil-and-gas industry, The Wall Street Journal has reported. Energy fund managers, however, said oil companies are unlikely to revert to their old, cash-burning strategies of growth at any cost.

Edwards said that while government support for the industry is welcome, he hopes that "any kind of political involvement stays at a minimum."

"These businesses have been around for over 10 years and have been successful through multiple administrations," he said of the companies that formed Flowco.

Flowco has the ability to expand even if U.S. oil production doesn't, as producing wells requires enhancing services along their entire lifetimes to slow declines in output, Edwards added.

Williams said that if drilling activity decreases too much and for too long, "eventually the production that Flowco gets to service diminishes." As with all other oil-and-gas businesses, Flowco's fortunes will depend on the future need for fossil fuels, he said.

"It's not sleight of hand but, at the end, we're all tied to the price and demand for oil and natural gas," he said. "Those are trends that nobody in the industry can control."

Write to Luis Garcia at luis.garcia@wsj.com

By Christine Idzelis

'What's encouraging is that the even-weighted S&P is leading,' says Navellier

The U.S. stock market broadened its rally this week, with all S&P 500 sectors booking weekly gains, as investors appeared relieved by interest rates in the bond market reversing some of their recent startling climb.

The S&P 500 SPX, Dow Jones Industrial Average DJIA and Nasdaq Composite COMP booked weekly gains, bringing all three indexes into positive territory for January, according to FactSet data. The S&P 500 and Dow each saw their biggest weekly rally since the week during which Donald Trump won the U.S. presidential election in early November.

"What's encouraging is that the even-weighted S&P is leading," which is a positive sign of the U.S. stock market broadening its climb, said Louis Navellier, chief investment officer of money-management firm Navellier, in an emailed note Friday. "Aiding the recent recovery is the major correction of interest rates."

An exchange-traded fund that tracks an index that equally weights stocks in the S&P 500 saw a bigger weekly gain than the S&P 500, the widely followed U.S. stock benchmark that has a heavy weighting toward Big Tech megacap stocks. After a rocky start to 2025 as Treasury yields jumped, the bull market's breadth is broadening ahead of Donald Trump's inauguration.

The top three sectors in the S&P 500 this week were financials, energy and materials, with each surging around 6%, FactSet data show. The financials sector XX:SP500.40 rallied as major Wall Street banks rolled out their earnings results for the fourth quarter - with Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) all posting huge weekly rallies of around 12%.

Banks this week have reported strong results for the fourth quarter, said Chris Davis, chairman of Davis Advisors, in a phone interview. Despite their recent rally, the banking industry trades at a "huge discount" to the broader U.S. stock market measured by the S&P 500 index, he said.

Read: Why S&P 500's financials sector just booked its best day since early November

Davis is a portfolio manager for the actively managed Davis Select Financial ETF DFNL, an exchange-traded fund that climbed 6% this week, FactSet data show. He said investors expect the banking industry may benefit from deregulation under the Trump administration. Less "regulatory complexity" would be good for banks, albeit not "radical" deregulation, he said.

Friday marked the last day of trading under U.S. President Joe Biden, with Trump set to be inaugurated on Monday. The U.S. stock and bond markets will be closed Monday in honor of Martin Luther King Jr. Day.

Major U.S. stock indexes closed higher Friday, with the Dow rising 0.8%, the S&P 500 climbing a sharp 1% and the technology-heavy Nasdaq Composite advancing 1.5%. All three indexes rallied this week as Treasury yields retreated in the bond market.

The yield on the 10-year Treasury note BX:TMUBMUSD10Y fell 16.1 basis points this week to 4.610%, the rate's biggest weekly decline since the period ending Nov. 29 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data. Treasury yields saw a big drop on Jan. 15, when a reading on core U.S. inflation in December came in slightly cooler than Wall Street anticipated.

The S&P 500 is now positive territory in January despite its biggest sector, information technology, still being down for the year. Tech XX:SP500.45 rose 1.6% this week but ended Friday down 0.2% so far in January, according to FactSet data.

The S&P 500's 2.9% climb this week left it up 2% in January through Friday, according to FactSet data. The Invesco S&P 500 Equal Weight ETF RSP staged a larger 3.9% rally this week, for a year-to-date gain of 2.7%.

Still, Big Tech stocks, which have an outsize weighting in the S&P 500, mostly climbed this week.

The Roundhill Magnificent Seven ETF MAGS - which equally weights seven closely watched Big Tech stocks including Apple Inc. (AAPL), Microsoft Corp. (MSFT), Google parent Alphabet Inc. (GOOGL) (GOOG), Amazon.com Inc. (AMZN), Nvidia Corp. (NVDA), Tesla Inc. (TSLA) and Facebook parent Meta Platforms Inc. (META) - booked a weekly rise of nearly 2% for a year-to-gain of 1.9%.

The U.S. stock market's rally this week included a 4% jump for small-cap stocks measured by the Russell 2000 index RUT, which is now up slightly more than 2% so far this year through Friday.

Falling rates in the bond market help support the high price-to-earnings multiples in the U.S. stock market, said Navellier, and remove "pressure off the more highly leveraged" small-cap companies.

-Christine Idzelis

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

U.S. Stock Indexes Advance; Magnificent Seven Tech Shares Rise

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By Randall W. Forsyth

"A strong dollar is in our national interest," Robert Rubin, Treasury secretary under President Bill Clinton, once famously declared.

A quarter of a century later, a strong dollar is viewed by the incoming administration of President-elect Donald Trump as a burden that makes U.S.-made goods too expensive and imports too cheap, both battering U.S. manufacturers. Trump's promised solution is expanded tariffs, which force other countries to pay large sums to the U.S. Treasury for trading with America.

Of course, most economists believe that tariffs end up being paid by consumers. But a provocative report written late last year by Stephen Miran, a senior strategist at Hudson Bay Capital and Trump's nominee to head the Council of Economic Advisers, turns that on its head. He contends that the tariff burden is borne instead by foreign producers. Tariffs, he says, result in a rise in the dollar's exchange rates, which offsets part of the cost to Americans consumers, and ends up making overseas producing countries pay the price.

Miran also argues that the undervaluation of other countries' currencies against the dollar can be dealt with through new policies, perhaps culminating in a "Mar-a-Lago Accord," analogous to the Plaza Accord, the deal made in early 1985 to bring down the then-high dollar.

The U.S. Dollar Index is up nearly 10% since its September lows despite Federal Reserve interest-rate cuts totaling one percentage point, which typically would lower the dollar, and is up about 6% since Election Day. This index reflects the greenback's value measured against a basket of currencies, dominated by the euro and the Japanese yen. Measured on a real trade-weighted basis, which better reflects current U.S. trade with countries such as China, Canada, and Mexico, the dollar is at nearly its strongest since 1985, according to a research note from Capital Economics.

Textbook economics says freely floating exchange rates should correct trade imbalances. Nations with trade deficits would see a weak currency, which should make imports expensive and exports more competitive, thus reducing the trade gap. Conversely, surplus nations' strong currencies would make imports cheap and exports dear, shrinking the surplus.

But that simplistic model fails to reflect the U.S. dollar's unique status, says Miran. The world's demand for U.S. dollar assets for reserves and transactions resulted in a persistent overvaluation of the greenback, he argues. That has hit U.S. manufacturing with attendant negative socioeconomic impacts.

Tariffs counter the negative effects of the chronic overvaluation of the dollar resulting from its international reserve status, he continues. In fact, the exchange-rate impacts of tariffs imposed in the first Trump administration largely prevented price hikes from being passed through to American consumers, he says. Thus, he concludes, the burden of the tariffs fell on the tariffed nations from their loss of income and wealth.

Scott Bessent, Trump's nominee for Treasury secretary, offered a similar line of reasoning in his confirmation hearing before the Senate Finance Committee this past Thursday. In a research note, Strategas' Washington research team led by Daniel Clifton wrote that Bessent said currency markets move about 4% to readjust for a 10% tariff increase. The Chinese yuan has risen almost by the same 4% since the U.S. elections, implying that the first 10% of U.S. tariffs has already been priced in.

Tariffs would serve three purposes in a Trump administration, according to Strategas. In addition to addressing trade imbalances, they would raise revenue for the government. They would also be used to achieve policy goals, such as increasing exports of liquefied natural gas, immigration enforcement, or more military spending by members of the North Atlantic Treaty Organization. Focus first will be on China, Strategas adds.

Tariffs are likely to precede any possible changes to dollar policies, according to Miran. "Tariffs are a tool for negotiating leverage as much as for revenue and fairness," he wrote. Tariffs provide revenue at a time of huge budget deficits, while currency adjustments don't. A shift in currency policy would need cooperation from trade partners, and tariffs would give the U.S. more negotiating leverage.

Trump has also repeatedly shown concern for financial markets, so his advisers may counsel caution in proceeding with currency policies that might increase volatility, Miran continues. So, he expects the administration's policies initially to be dollar positive before it is dollar negative.

That doesn't mean investors should dismiss the chance of something like a Mar-a-Lago Accord, he says. "Wall Street consensus that an administration has no means by which to affect the foreign exchange value of the dollar should it desire to do so, is wrong," Miran concludes. The strong dollar has hurt U.S. manufacturing "while benefiting financialized sectors of the economy in manners that benefit wealthy Americans," he points out.

Yet those who seek to debase the dollar should be careful what they wish for. Demand for U.S. assets has allowed Americans to consume more than they produce, notably helping to finance the massive federal budget deficit.

The main beneficiaries of a weaker greenback would be alternatives such as gold or cryptocurrencies, both of which hover near records. Perhaps those markets are anticipating coordinated efforts to cheapen the dollar as part of the incoming administration's America First policies.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.