A Day at the Theme Park
Theme parks like those at Walt Disney World are popular with both young and old, as they provide a journey into a world of fantasy. A trip to Disney World allows visitors the opportunity to experience thrill rides, fantasy shows, culinary treats, and more. But how does this relate to the markets and economy, you ask? Well, sometimes investors get caught up in their own fantasy world (trying to time the markets or ignoring market and economic data), expecting the excitement and highs of a thrill ride, only to experience the queasiness of the teacups (a Disney ride) or the horror of the haunted house. With the uncertainty that pervades the economy and markets right now, an examination of some of the rides at Disney and how they might correspond to the financial world might be a welcome break for those not lucky enough (or wealthy enough) to head to Disney to experience it in person. Grab your e-tickets (for those old enough to remember) as we visit several top attractions at Disney with an eye to the markets and the economy.
Financial Markets
As one enters a theme park, there is always a bit of excitement in the air in anticipation of what the day might bring. Many times, that excitement comes from experience. That is the case as we head deeper into February and look back at last month. While January saw an uptick in volatility, the indexes all moved higher, led by the S&P 600, which posted a very solid 5.61% gain on the month. The S&P 400 index added 4.05%, and the MSCI EAFE gained 5.19% during the month. While the DJIA (up 1.80%), the S&P 500 (up 1.45%), and the NASDAQ (up 0.97%) all did well during January, it was nice to see the other indexes lead the way. Given the stretched valuations for large cap stocks, this is a healthy situation. Even though the Fed held rates steady in January, the Bloomberg US Aggregate Bond index finished in positive territory, as it posted a 0.11% return.
It is earnings season again, and for now the results have been a bit like the Winnie the Pooh ride at Disney – mild, fun, not too scary, and leave you feeling good. As of early February, companies in the S&P 500 have reported 11% earnings growth year-over-year, compared to expectations of just 7%. In addition, over half (54%) of companies reporting forward guidance expect above consensus growth versus the historical average of 40%. This is a positive development and should help buoy stock prices.
Having said that, the outlook is like heading onto Space Mountain – a bit scary, and investors may be in the dark about what to expect. As we noted last month, valuations are the main culprit here, and it is tough to see how the markets can maintain the level of performance we have seen recently. Strong earnings, tax cuts, and other tailwinds may provide positive returns, but expanding valuations are likely not in the cards and probably should not be. Let us hope when we get off this market ride in 2026 that we are not as sick as some are when exiting Space Mountain.
Here is the most recent data regarding several market valuation indicators. Note that the data is as of January 31, 2026 (Buffet Indicator as of February 5, 2026), and while some have improved slightly, they still indicate that the markets are strongly overvalued.
| Valuation Metric | Description | Latest | 30-year Avg. | Signal |
| P/E | Forward P/E | 22.0x | 17.1x | Strongly Overvalued |
| CAPE | Shiller’s P/E | 40.6x | 28.6x | Strongly Overvalued |
| Dividend Yield | Dividend Yield | 1.4% | 2.0% | Strongly Overvalued |
| Buffett Indicator | Ratio of market cap to GDP | 218.7% | 111% to 135% | Strongly Overvalued |
The Economy
The economy is a bit like the Expedition Everest ride at Disney’s Animal Kingdom. The thrill ride is full of twists and turns, ups and downs, and an element of surprise (for first timers, at least). Economic data continues to be a mixed bag, with some good and some not so good. For example, the broader economy, as measured by GDP, is growing faster than expected, while consumer sentiment is hitting historically low levels. Likewise, consumer spending remains strong, while job layoffs are rising. U.S. manufacturing is in retreat based on the 200,000 jobs that have left the sector since 2023 while worker’s wages increased faster than inflation over the past year. Factory activity posted its fastest gain since 2022 per the ISM manufacturing index and five of the six largest manufacturing industries expanded in January, while concerns over AI have sent the tech sector reeling in recent days. The budget bill that was passed last year included some tax changes for individuals and corporations, and the full effects of those changes will start to be felt this year, further boosting economic activity while continued concerns over tariffs could be a drag. Like the ride at Disney, ups, downs, twists, and turns dominate the news and the volatility can make one a bit nervous. Unlike the ride (spoiler alert) the economy is not expected to slide backwards into a recession this year, but the uncertainty will not allow investors to get too overhyped either.
GDP (Gross Domestic Product) – There are some that think we are living in a fantasy land like the one in the Magic Kingdom at Disney when reviewing the latest GDP numbers. They like to note the issues in the labor markets due to AI, manufacturing weakness, inflation stickiness, and on-again, off-again tariffs as reasons why the data is not a real picture of the economy. Whatever they may think, the economy, as measured by GDP, is doing just fine, thank you! Third quarter 2025 grew at a 4.4% rate, after growing by 3.8% in the second quarter. Fourth quarter data will not be released until later this month, but the latest data from GDPNow’s model shows the economy grew by 4.2% (as of February 2, 2026) during the last months of 2025. If that holds true, the full-year figure should surpass 2.0% and push well past initial estimates for the year. That is no fantasy. Estimates continue to show the economy slowing to the longer-term averages seen prior to Covid at slightly less than 2.0%, but if the uptick in manufacturing activity continues, the increased tax refunds many expect this year hold true, and the Fed helps borrowers by lowering interest rates, we could see growth accelerate.
Inflation – For little kids, the It’s a Small World ride at Disney is one of whimsy and fun and joy. For older kids and adults, the ride is a welcome break from the Florida sun at best and, at worst, provides a song that gets stuck in one’s head and is hard to get rid of. Sounds a lot like inflation. We got on this ride (inflation) coming out of Covid and, like the attraction’s song, we can’t quite get rid of it. In January, the government reported that the CPI sat at 2.7%, after rising 0.3% in December. The rate has been range bound between 2.5% and 3.0% for some months now and we may be stuck with the song, err inflation, for some time yet. Truflation is more encouraging, as their rate sat at just 1.01% as of 2/5/2026. Expectations are that energy and home prices should continue to fall or stabilize, and that should help the rate slowly inch its way to the 2.0% Fed target. Unfortunately, however, we are stuck with it for the foreseeable future.
Employment – What a mess. Not so much what is going on in the labor markets, although that is not great, but what is going on with our government and shutdowns. We recently had another partial shutdown (hardly any mention of it this time, however), and that has delayed the release of January data by several days (by the time you read this the report should be out). While the data is not yet available, there have been many layoff announcements recently, and it would not be a major surprise to see the unemployment rate tick higher. According to most reports, companies that are laying people off are both blaming AI for the layoffs, but cheering the potential impact AI may have on creating efficiencies. Should the report show a larger than expected jump in unemployment claims and fewer hirings, the markets will react negatively, as fears of a recession will be flamed. On the other hand, should the report show better news, the markets will likely rally. In some ways it feels like being on the Dumbo ride at Disney – going up and down and around in circles. Unlike the Dumbo ride, the employment data affects the overall economy and our outlook. Wisconsin’s unemployment rate has stayed flat at 3.1% and Madison’s has ticked slightly higher to 2.4% (both from December’s preliminary reports). Even with recent layoff announcements, the Sahm Rule declined in December to 0.35 from 0.43 which, in theory, means a recession is less imminent according to this indicator. Hopefully, by next month we will have reports in a timely manner and a better understanding of where our ride is headed.
The Fed Watch
Finally! President Trump has announced his pick to head the Federal Reserve, and it is Kevin Warsh, who will succeed Jerome Powell in May if the Senate confirms him. In the meantime, do not expect the Fed to cut rates, barring some significant economic news. Mr. Warsh will likely look to reform the Fed by shifting away from Quantitative Easing (which he initially voted for in 2008 but is now against), reduce abundant reserves at the Fed, and stop paying banks interest on reserves held there. These changes will be done over time, while the more immediate changes could be lower interest rates. The new Chairman will have to deal with those internal issues and external issues like AI, digital currencies, sticky inflation, and changes in the labor markets. Investors are hoping that he will make the appropriate changes that will help usher in a great big, beautiful tomorrow like the theme song of the Carousel of Progress attraction at Disney World says.
Outlook/Summary
The intent of this commentary was not to make light of economic or market conditions, but to show both how things can sometimes feel detached from reality (like being at Disney World) or how to better understand the ups and downs, twists, and turns, of the economy and markets. After all, investors want their experience to be like Disney World’s slogan, “the most magical place on Earth” or Disneyland’s slogan, “the happiest place on Earth,” and not the “scariest place on Earth”! The markets are overvalued, and right now it feels a bit like being on the Tower of Terror ride (big drops followed by big upward movements, or vice versa) as the markets react to both economic and corporate earnings reports. Therefore, investors need to act like parents taking young children to Disney – being mindful of what the day will bring (both good and bad) and preparing for it, as there are economic and market risks, but also some beneficial tailwinds. Investors should expect volatility to increase, returns to be less robust than in the past few years, fixed income to continue to perform well as rates moderate, and economic growth to slow to pre-COVID levels.
With lofty valuations, especially for stocks like the Magnificent Seven, it will take strong earnings to continue to push the markets higher. Valuations for the broader market are less frothy and, therefore, the potential for stable and/or greater returns may be found more in diversified portfolios than those focused solely on the Magnificent Seven or the tech sector. Likewise, the potential for a correction or other market drawdown has increased, meaning preparing for the downside is important. Considering that, we will continue to try and protect the downside but also seek upside return. We will not time the markets but will continue to utilize diversified portfolios that can take advantage of market rallies and be protective during market pullbacks. This has been a proven winner in the long run, while perhaps not outperforming in any given rapidly rising market.
Should you like to discuss your portfolio or learn if our strategy can work for you, please call the Wealth Management division of Lake Ridge Bank at (608)826-3570. We look forward to speaking with you.
Market/Economic Data
As of January 31st, 2026…. Unemployment data is through December (delayed due to partial government shutdown recently) for national, December for Wisconsin (preliminary) and Madison (preliminary); inflation data is through December, Truflation as of 2/5/26:
| Index | Month Return | YTD Return | Index | Month Return | YTD Return or Current |
| DJIA Industrials | 1.80% | 1.80% | EAFE | 5.19% | 5.19% |
| S&P 500 | 1.45% | 1.45% | Blm US Agg Bond | 0.11% | 0.11% |
| S&P 500 Equal Weight | 3.39% | 3.39% | Inflation (CPI All-items) | 0.3% | 2.7% annualized; Truflation 1.01% |
| S&P 400 | 4.05% | 4.05% | U.S. Unemp. | 4.4% | 50,000 new jobs |
| S&P 600 | 5.61% | 5.61% | Wisconsin Unem. | n/a | 3.1% |
| NASDAQ | 0.97% | 0.97% | Madison Unemp. | n/a | 2.4% |
Thank you for your business – we look forward to speaking with you soon. (Note – this commentary used various articles from JP Morgan, Morningstar, the Wall Street Journal, Investor’s Business Daily, Northern Trust, CNNMoney.com, msn.com, Kiplingers.com, nytimes.com, Fidelity Investments, American Funds, LPL Financial and other tools as sources of information.
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