My grandson, Anton the 5th, and I flew our Piper Cherokee laterally across the country from southern Texas to the Annual AirVenture aviation event in Oshkosh, Wisconsin, earlier this month.  This is the largest aviation event in the world, with over 10,000 planes flying into Oshkosh airport, with planes landing every 20 seconds!  The weeklong event has over 600,000 people attending the activities. This is my fourth trip flying to AirVenture, covering over 1800 miles round trip.  Flying through the Midwest during the summer is always a challenge with pop-up thunderstorms, tornadoes, rain, and low cloud ceilings.  

During this year’s flight, the weather was particularly challenging with our best route to fly above the clouds at 7500’.  At this altitude, we found a 4000’ separation above the lower clouds and below the upper cloud layers.  Not only did we avoid the turbulent inclement weather below, but we flew in smooth, stable air and about a 15-mile-per-hour tailwind.  The view was terrific flying between the cloud layers and watching the landscape pass below. 

Our luck ran out in Missouri as thunderstorms blocked our way, forcing us to land and stay the night.  Our choice was good as we heard all night rain pounding the hotel windows with thunder and lightning. There’s a saying in aviation, “It’s better to be on the ground wishing you were flying than being in the air wishing you were on the ground”.  We were glad to be safe in our hotel room that night. The rain continued in the early morning and cleared by midday. We were able to continue our journey and make it to AirVenture by that evening with a beautiful sunset.

The economy is also starting to show new signs of potential turbulence.  In April, investors panicked with President Trump’s tariff announcement sending stocks into steep declines and erasing trillions in corporate valuations, all based on speculations.  The selloff was short-lived as the worst fears proved to be unrealistic, and the S&P 500 bottomed on April 8 and by April 21 established a new positive trend that continues to this day. 

However, there are distinct differences between the panic selloff earlier this year and what seems to be developing now.  In March and April, investors were nervous about the impact of new tariff policies while economic indicators and the labor market remained stable.  The stock market rebounded as investors rebuild their stock portfolios, taking advantage of buying opportunities. 

However, while the stock market is currently on a solid rally with positive technical indicators (more on this later), the fundamentals of the economy are weakening along with consumer sentiment at record lows.  We have addressed the eroding of consumer sentiment based on the significant rise in the cost of living that is outpacing pay raises.  Mortgage rates are stubbornly holding in the mid 6% range, forcing eligible buyers to rent. Matt and I discussed recently on our podcast, Day Break with Anton, the ticket shock at restaurants for no-frill meals.  It’s hard to get out of the restaurant for a family of four for less than $80.  Even fast food, which used to be a rescue for families needing a quick and inexpensive meal for the kids, is no longer a bargain. 

Last week, we discussed how companies are embracing AI technology and looking for opportunities to reduce their employee count.  For the past week, there have been multiple articles about the weakening job market at all levels, from new college graduates to seasoned employees. 

On Friday, the Wall Street Journal reported the status of Americans seeking employment.  In the article titled “Unemployed Americans Endure Longer Job Searches in a Cooling Market”, they stated,

• “Beyond the headline-grabbing top-line numbers in the jobs report for July was another striking piece of data: The number of people unemployed for at least 27 weeks topped 1.8 million, the highest level since 2017, not counting the pandemic’s unemployment surge. The median length of unemployment in the U.S. has also ticked up, from a seasonally adjusted 9.5 weeks in July 2024 to 10.2 weeks last month.”

The Wall Street Journal provided the following chart illustrating the number of people unemployed for more than 27 weeks, which is climbing to levels not seen since 2017.

On Saturday, the Wall Street Journal featured the front-page article titled "Hiring Slows Sharply in Summer”.   The jobs report released by the Bureau of Labor Statistics on Friday stated that US employers only added a mere 73,000 jobs.  President Trump did not like the report, so he shot the messenger and fired the BLS Commissioner, Erika McEntarfer.  The good news is that there are still more job openings than during his previous presidency.  Advice for the new commissioner: if the news is bad, let a colleague make the announcement. 

However, the focus of the article was not the controversial jobs report, but the multiple months of downward revisions of previous jobs reports.  It is one issue to release poor results of the monthly job market, but worse to follow up with additional downward revisions months later.  In the same article, the Wall Street Journal provided the following chart illustrating the revisions of the past five months’ job reports.   There are fewer job hires than feared, and employer payroll growth is slowing.

The decline in consumer sentiment is further confirmed by a material decline in household spending for both discretionary and staple items.  Both the Consumer Discretionary ETF (XLY) and Consumer Staple ETF (XLP) have significantly underperformed the S&P 500 with YTD gains of -2.59% and 2.6% respectively. 

Fundamentally, the status of the economy and households appears to be eroding. 

Meanwhile, the stock market remains in a technically strong uptrend.   Nasdaq has taken the lead among the key indices as the top-performing index trailing 12 months, followed by S&P 500, S&P 400 (mid-cap), and S&P 600 (small-cap).  The S&P 500 Bond index has remained stable throughout this year due to the stability of interest rates.  The MSCI Ex US index that jumped earlier this year seems to have peaked late June, as Nasdaq now leads in YTD, with the S&P 500 closely behind.  The narrow list of stocks in the Dow Jones Industrial Index is in the middle of the pack in terms of gains. 

The Nasdaq and S&P 500 reached new highs last week, while the other US indices are below previous record highs reached earlier this year.  The following are the trailing 12-month returns of these indices through yesterday:

NASDAQ: 24.70%

MSCI Ex US: 19.29%

S&P 500: 17.80%

Dow Jones Industrial Average: 11.04%

S&P 400 Mid Cap: 6.35%

S&P Bond: 4.21%

S&P 600 Small Cap: -3.00%

What Does This Mean to Me?

Our portfolio management strategy is based on the core focus of momentum, confirmed by technical and fundamental analysis.  There are many scenarios in which the market indices and growth stocks continue to rally despite eroding fundamentals, even with sky-high valuations.  Warren Buffett famously stayed out of tech stocks during the huge 1990s rally, stating the industry fundamentally did not make sense to him.  Tech stocks were soaring in price even though many had no profits.  As a momentum investor, we rode the wave of stock appreciation in the late 1990s, and when the momentum reversed in early 2000, that was the indication to take profits and sell. 

Our experience is that fundamentals eventually prove to be correct and stock prices adjust to more accurate valuations of the company’s true profit growth.  The tech bubble bust in 2000 validated the fundamentals of correct stock hype overvaluation, but not until years later.  Millions were made by investors riding the wave of stock appreciation, while others stayed on the sidelines, criticizing insane valuations.  Institutional investors can drive up stock prices sometimes for years in anticipation of outsize profit opportunities.   What typically follows in dramatic fashion when industry leaders do not meet investors' high expectations is a tsunami selloff that can trigger a market meltdown, as in 2000 – 2003.  Momentum style investing does not care why stocks or the market are rallying, so long as the positive momentum continues.  Once the momentum reverses to a down cycle, regardless of the reason, it is time to reduce the holdings.

However, it is worth mentioning that as valuations of key stocks and sectors exceed upper ranges of historical averages along with eroding fundamentals, it is a signal to pay attention to indications of weakening institutional investor support as they try to stealthily reduce their holdings.  With poor fundamentals, it is not if stocks will correct, but when.  It may be years later, but there will be a steep correction.

Currently, the S&P 500 is in a positive technical uptrend above its 20, 50, and 200-day moving Averages (DMA).  Note that the index only recently rose above its 200 DMA.

We maintain our favorable view on the US economy and stock market. 

BTW, if you need a break from all the political and economic noise, you might consider what Anton V does while I am attending exciting aviation workshops on weather and navigation.

Let us know if you have any questions about this UPdate or would like to schedule a time to meet.