With the market breaking records week after week, you might expect this week’s commentary to be filled with rainbows and unicorns. Far from it. While the markets have broken record after record, there are many contractionary indicators in the economic data.
Confusing Signals
Economic indicators have been less than clear. That’s really an understatement. Here’s the highlights of some of the more contradictory indicators:
1. Investor optimism actually rose during the quarter, but Gold reached an all-time high. If Gold is typically considered a safe haven in times of uncertainty, why did investor sentiment rise?
2. Existing home sales jumped in August but home construction starts cratered in the third quarter. With an increase in demand, and the fact that home prices are steadily increasing, you’d think that housing construction would rise, taking advantage of higher demand.
3. Investors are keeping in excess of $7.7t (that’s seven trillion dollars) sitting in savings accounts and money market accounts despite the S&P reaching new highs.
4. Unemployment rates are equally confused. Unemployment increases often stem from ‘supply-side’ like cooling economic activity rather than the ‘demand-side’ shocks like mass layoffs. The contradiction is that job openings are increasing, slightly, but rehiring is slower. Demographic shifts are also causing some of this friction.
The only theory that makes sense of these contradictions is, investors are simply concerned about a possible correction despite good current economic and market performance. Simply the fact that the market is doing so well, and has done so well, people are concerned about ‘the inevitable correction’, even without objective evidence of a coming downturn.
Tariffs?...meh
The “Tarifflation” that some were predicting as a result of the administration’s tariff regime simply didn’t arrive. Core inflation for the third quarter of this year was 3.10%. Remember, this number doesn’t include food and energy. The number this time a year ago was 2.74%. Not a big change and nowhere near justifying the hyperventilating we were subjected to back in March. You run into problems when blaming inflation on just one economic input. Tariffs are not the only thing that effects inflation. Monetary policy is far more impactful. Continued government spending and printing of currency has been and always will be the most prevalent factor in inflation rates.
The data actually shows that prices on non-tariffed domestic products rose more than tariffed imports. Also, domestic goods competing with tariffed imports were down since ‘Liberation Day’.
Previous administrations (R and D) avoided tariffs and preferred subsidizing so called ‘strategic’ industries. The irony is that this led to more inflationary pressures than the tariffs would’ve. When the government prints more money and gives it to private companies it directly leads to more inflationary pressures and the inevitable political games as to what constitutes ‘strategic’. So far, the tactic seems to be working as more countries line up to negotiate as opposed to retaliating.
Markets
We forecast the Fed Reserve reduction in interest rates (it was pretty obvious) and we still expect at least one more adjustment before the end of the year. Consensus is that the Fed will drop rates by another 25 basis points (that’s 0.25%) but there are calls to increase that number to 50 basis points. Given the timidity of the Fed to jostle markets, this isn’t a likely outcome.*
AI stocks still lead the way during the 3rd quarter. The ‘Magnificent 7’ continues to grow their share of the market against the rest of the S&P 500, increasing by 14.23% (as of writing) after lagging the S&P earlier in the year. Interesting side note, not all the stocks in the ‘Magnificent 7’ are still the seven largest companies in the S&P. Broadcom (AVGO) replaced Tesla (TSLA) in terms of market capitalization.
The S&P 500 year to date has risen 11.41% (as of writing) and the NASDAQ 100 rose 15.27%. Our main concern with the market isn’t the record highs, it’s the lack of breadth of those highs. What do we mean by that? The concept is that there are fewer stocks that are representing the gains in the S&P as a whole. The reliance on those highs are at the mercy of a small number of companies, that, as it happens, are in the same or very similar industries. Contributing to this, as these stocks look more attractive, the more people will invest, for the fear of missing out if nothing else, narrowing the market gains even further. To be clear, we’re not forecasting a tech crash, we’re just saying that a lot is riding on the speculation of these new technologies and more importantly, their future contribution to wider economic growth.
Conclusion
With the markets reaching new record highs, we’re not confident to “call the top”. As we stated earlier, the picture isn’t clear that we’re headed towards some kind of ‘off the cliff' correction. Remember, risk is highest when we make rash or emotional decisions. The fact that the market is the highest it’s ever been, doesn’t mean it can’t go higher. Eventually, the market will correct and then rebound just as it has in the past.
The key, as always, is stay the course and pay attention to your particular financial situation more than the day to day dramas of the markets. Are your assets aligned with your current and future needs? Have you done a Family Financial Inventory? Have you projected your budget and included a realistic inflation rate? Do you have a Trust? If you haven’t covered all these topics with your financial advisor recently, give us a call.
DISCLOSURES:
These views are those of the author, not of the broker-dealer or its affiliates. This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. All investments involve risk, including loss of principal. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Indexes are unmanaged and cannot be invested in directly.
Nasdaq-100 is a stock market index made up of equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. It is a modified capitalization-weighted index
*LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial. Also offered, access to third party vendors that enable clients to create self-guided legal documents