Digging into the Data
Good teachers encourage students to dig deeper into their studies or research and not take things at face value, for sometimes things are not what they appear to be on the surface. That idea hit home to me recently while watching the movie The Thursday Murder Club on Netflix. It is a wonderful story starring Helen Mirren, Pierce Brosnan, Ben Kingsley, and Celia Imrie among others whose characters form the club that the title derives its name from. During one of the scenes Helen Mirren’s character was asked to peer into a recently dug up grave. Seeing a skeleton, she asked what the big deal was as it was a grave, and the answer was given in the form of an instruction to look more closely, for the skeleton was lying on top of a casket, not in it, and this became a key clue to the murder case the club was investigating. You see, it was not surprising to find a body in a grave, but it was surprising to find that there was an extra body in the grave and not just the body of the person who was buried there in the casket. Details! Without looking more closely she would have missed the clue and perhaps not solved the case. Sorry for the gruesome example, but it is the month of Halloween after all! The moral of the story is that if we only take things at their face value and do not dig deeper or pay closer attention, we may miss clues as to what is really happening, and that applies to market and economic data as well. Let’s dig into some of that data and see if we can glean any insight by digging a bit below the surface.
Financial Markets
The markets continued to march higher in September, but is there more to the story? Certainly, there is, but first the data. The Dow was up 2.00% in September, while the S&P 500 added 3.65% during the month. Year-to-date, both exceed their long-term annual averages and are quite rich in their valuations. The S&P 500 index P/E stood at 22.8x as of September 30th versus its 30-year average of 17.0x earnings, and it exceeds all valuations at major inflection points (when the market turns) over that time span except for when the market peaked at 25.2x earnings in March of 2000, at which point the tech bubble burst. Yes, the markets are different today, but the dominance of just a few stocks should raise some concern, even if it just means below average growth for a period of time and not a crash. Mid-cap (up 0.46% in September) and small-cap (up 0.98% in September) stocks are not overvalued but have had a nice run over the past three months (5.55% and 9.11% respectively). International equities continue their winning ways as the EAFE added 1.64% on the month, although domestic indices have gained ground in recent months. Bonds had another terrific month, adding 1.09% in September and are now up 6.13% year-to-date.
Volatility has been absent from the market since the VIX hit a high of 52.33 in April, as it currently stands at 16.64, which is lower by over 7.0% year-to-date. Is that reading deceptive? It does not seem to be, as the only true period of volatility was during April, but the speed with which it rose that month is something investors should be mindful of. On the other hand, the recent corporate tax cuts should help boost the markets. Looking at past data, the markets have generally exceeded annual market averages in the year of a corporate tax cut by about 1.7%, and by about 5.1% the year after one was enacted. Both are excellent numbers that could help offset any weakness due to valuations if they hold true this year and next. Digging into the data can help investors make decisions as to how to invest and now is an important time to pay attention to details. For more market and economic data, please see the end of this commentary.
The Economy
The economy is playing right along with our premise of needing to dig deeper into the data and not just take things at face value. GDP fell to start the year (the economy is headed towards a recession, right?) and then rebounded beyond what was expected in the second quarter (the economy is booming, right?) and is expected to perform quite nicely in the third quarter. Yet, given all that, why the economic fear? Consumer sentiment is down over 21% year-over-year and is near a ten-year low, indicating consumers are concerned about the economy and are tightening their wallets. Or at least that is what it appears, but what if we dig a bit deeper into what consumers are actually doing? Turns out that the American consumer is spending at an all-time high, as U.S. real personal consumption expenditures (PCE) hit $16.587 trillion in August, and the trendline continues to go up. So, are we headed for a recession because the consumer says they are fearful or is the economy likely to continue to grow because the consumer continues to spend?
Tariffs are certainly another issue that could be a drag on the economy, yet at the Jackson Hole Summit Fed Chair Powell certainly was less concerned about the tariffs’ impact on inflation than he previously noted. While there might be a short-term impact, virtually all economists agree that their long-term impact on inflation will be minimal. On the other hand, they are having a small, but actual impact on government receipts as tariff revenue hit $31.3 billion in September, with year-to-date receipts over $214 billion. Yes, it is a small percentage of the government deficit, but every bit helps.
Let us look at some key economic data points for additional details as to how the economy is performing, what might be expected, and how the data may impact the markets. Note that some data points may not be as current as desired due to the government shutdown (which will have minimal to no effect on the economy if past shutdowns are any indication).
GDP (Gross Domestic Product) – Observing the quarterly GDP data points is a little bit like trying to follow the proverbial bouncing ball. Up and down we go. The data showed that we contracted by 0.6% in the first quarter but bounced back by growing at a rate of 3.8% in the second quarter (third estimate). Heading into the third quarter, estimates were that GDP would grow, but at a slower rate (perhaps closer to 2.5%) due to slightly rising inflation, the tariffs, a deteriorating jobs picture, and more. Those weaker expectations faded as the quarter played out and estimates moved higher. While the data may be delayed, the most recent estimate for third quarter growth per GDPNow is 3.8% (as of October 1st), much higher than earlier forecasts. Full-year estimates, however, continue to hover around 2.0%, but if the third quarter number is close to reality and the fourth quarter exceeds expectations as well, perhaps the full-year number will head closer to 3.0%.
Inflation – There are multiple ways of looking at inflation and its causes and most of those have been discussed ad nauseum. The bottom line is that inflation has not reached the Fed’s 2.0% goal and has started to increase somewhat. Tariffs are the latest excuse for inflation (and therefore a slowing economy supposedly) as they only increase prices paid by consumers, or so say the talking heads. The data shows something different, though, as we can see by looking at a recent example. When President Trump raised tariffs on China in his first term, the impact on inflation was the opposite – inflation fell as tariffs increased. Note that President Biden did nothing to remove or decrease these tariffs as the benefits exceeded the costs to the economy. This is not an argument for tariffs as they do have a cost and can act as a tax on the economy, but the inflationary impact is minimal, especially over the long-term. Per the latest data from the federal government, CPI increased by 0.4% in August and stands at 2.9% over the last 12 months. Truflation is reporting more current data and stands at 2.22% as of October 6th.
These numbers clearly show that inflation is increasing but the impact is not expected to last as can be seen by looking at some of the components of CPI and how they impact the consumer (remember the consumer continues to spend). If we break down CPI into three components, services ex-shelter, shelter (housing, rent, etc.), and goods, and look at the data, we find that the cost of goods has fallen dramatically from the impact of COVID and has remained somewhat steady over the past few years. The cost of services has remained fairly steady since before COVID, and shelter has begun to decline as recent data shows rents are coming down and they have a delayed impact on CPI. Thinking about consumers, their largest cost is shelter, and that is starting to impact CPI, services are expected to remain stable (other than healthcare), but goods prices might increase due to tariffs, etc. (although food is not expected to be impacted by tariffs as most is produced domestically). The question is how much and for long, but as we have shown above, we do not expect that impact to last.
Unemployment – While current data is not available from the government, recent data has shown that the number of new jobs being created has been declining. This is likely due to layoffs and lack of hiring by the federal government and declining immigration. If we look at other sources such as ADP (reporting a decline of 32,000 private sector jobs in September) and Dow Jones (expecting a gain of 51,000 nonfarm jobs and a steady unemployment rate of 4.3%), we clearly see a reluctance on the part of employers to hire (and fire/layoff for that matter). The Sahm Rule Recession Indicator stands at 0.13 indicating that a recession is not imminent, at least from an unemployment standpoint.
Another data point to look at that may provide a better point of view than the number of jobs created or the unemployment rate is personal current tax receipts by the federal government. While the number of jobs being created has been declining (since COVID), the level of tax receipts has been, and is, climbing. This is another reason as to why the consumer continues to spend, and why the economy has not fallen into a recession. Details!
Wisconsin (3.1%) and Madison (2.7%) unemployment rates remained flat according to preliminary numbers for August.
The Fed Watch
The Fed claims they are data dependent and that details matter. Sounds good. It just depends upon what data they are referring to and how closely they pay attention to the details. With inflation continuing to run above the Fed’s target of 2.0%, the Fed needs to find the right levers to pull given the data points they pay attention to (whatever they are specifically). As expected, the Fed did cut rates by twenty-five basis points in September and are likely to do so again at least one more time by the end of the year, and three or four more times by the end of 2026. Given the level of interest rates and the rate of inflation currently, there is some wiggle room for the Fed to cut, but they also run the risk of stoking inflation should they cut too soon or too fast (unless the economy were to stumble). The bond market is nervous about the U.S. debt and that may limit some of the effectiveness of rate cuts on things like mortgages. As always, investors should continue to monitor the Fed and pay attention to details, such as Fed comments, or how they shifted their stance on the effects of tariffs.
Outlook/Summary
Data is important but investors need to pay attention to more than just data points and review the details surrounding those points. Valuations are quite rich right now and while things could continue to go up from here, investors will need to see faster earnings growth, lower interest rates, or new innovations to maintain the current course. AI is the driving force right now, but is it enough to power valuations to further heights? Only if that innovation leads to faster economic growth, which we are not seeing yet. Yes, over time, AI will change the world, but investors are gambling on that right now as evidenced by the fact that the top ten tech stocks make up almost 40% of the S&P 500. We have seen how fast those stocks can fall should the economy stub its toe, such as in 2022 or get hit by an unexpected event, such as COVID. The economy appears to be strong enough to withstand some of the weaknesses in jobs and manufacturing, etc., but not strong enough to continue to drive the markets higher. Unfortunately, investors may be ignoring the details and are taking FOMO (fear of missing out) to a new level of YOLO (you only live once) and that could come back to haunt them (no pun intended given Halloween is right around the corner).
So, what to do? Prepare for the unexpected by paying attention to more than just data points and being invested in a manner that reflects that preparation versus just reacting to change as it occurs. We believe in diversification and taking the approach of protecting the downside first while seeking upside potential. That may mean that we miss short-term momentum moves to the upside, but we minimize the impact of the downward moves. Therefore, we do not participate in market timing trading activities, such as all the speculative daily options trading that is all the rage right now, and we allow time to work in our favor. Should you like to discuss your portfolio or if our strategy can potentially 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 September 30th, 2025…. Unemployment data is through August for national (no new data due to shutdown), August for Madison and Wisconsin (both preliminary); inflation data is through August:
| Index | Month Return | YTD Return | Index | Month Return | YTD Return or Current |
|---|---|---|---|---|---|
| DJIA Industrials | 2.00% | 10.47% | EAFE | 1.64% | 22.34% |
| S&P 500 | 3.65% | 14.83% | Blm US Agg Bond | 1.09% | 6.13% |
| S&P 500 Equal Weight | 1.11% | 9.90% | Inflation (CPI All-items) | 0.4% | 2.9% annualized; Truflation 2.22% |
| S&P 400 | 0.46% | 5.76% | U.S. Unemp. | 4.3% | 22,000 new jobs |
| S&P 600 | 0.98% | 4.24% | Wisconsin Unem. | n/a | 3.1% |
| NASDAQ | 5.68% | 17.93% | Madison Unemp. | n/a | 2.7% |
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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