“Piglet noticed that even though he had a very small heart, it could hold a rather large amount of gratitude.”

A.A. Milne #gratitude #thanksgiving #piglet #aamilne #winnethepooh #happythanksgiving

The market has been on a wild roller coaster ride since our last publication on November 5, 2025. First the DJIA rallied 1,343 points in four consecutive sessions and then fell 2,163 points in the next four sessions. A lot of factors triggered this volatility but primarily it was linked to the changing expectations for a fed funds rate cut at the upcoming December FOMC meeting. At the risk of oversimplifying the market, it is obvious that investors feel safe to buy stocks when the Fed is dovish and lowering interest rates. But Federal Reserve Jerome Powell’s comments in mid-month suggesting a rate cut in December may not be guaranteed was a blow to this sense of safety. As a result, the consensus expectation for a December rate cut fell from 90% to 30% and has since rebounded to 82%.

What we noticed when we updated our files this week was that despite all the volatility in the stock market, the popular indices are where they were before we left for vacation. Technical indicators are also little changed, though a bit weaker than in early November. And economic data has also shown little change. Overall, economic data reveals no signs of a recession, but labor and housing markets are weakening.

Perhaps the most important data release was the delayed report on September payrolls. While the headline increase of 119,000 jobs was better than expected, the underlying data suggests something much weaker. BLS revisions indicated August payrolls were lower by 26,000 jobs, which means August payrolls declined by 4,000. July payrolls were revised down by 7,000 jobs. If one adjusts the September payroll for this revision of 33,000 jobs it meant there was a net gain of 66,000 jobs in September. Moreover, most job gains were in healthcare and leisure & hospitality, and many sectors had job losses. The unemployment rate rose modestly to 4.4%, because even though unemployment rose significantly in the household survey, the civilian labor force also rose. See page 4.

Keep in mind that November’s employment report will be released by the BLS on December 16 and there will be no October report. However, this means there will not be any more job data prior to the next FOMC scheduled for December 9-10, 2025.

September’s job report is important because it will be the last report before the next FOMC meeting and because the BLS indicated that survey responses were better than average. This implies that the data should also be better than the recent norm. In our view, the best test of strength of the labor market is defined by annual growth in jobs. Therefore, we measure the year-over-year growth rate of employment in both the establishment and household surveys. The establishment survey showed jobs increased 0.8% YOY in September and the household survey had an increase of 1.14% YOY. Both were below their respective long-term averages of 1.7% and 1.5%. The good news is that BLS surveys continue to show job growth, the risk is that both rates are decelerating. A negative growth rate in employment is the definition of a recession. Our fear is that once the BLS makes its annual adjustments to the data (scheduled for January’s report released in early February), it could show that job growth has already turned negative. (Note: recessions are usually identified retroactively.) Given that this is a risk, we believe it would be prudent for the Fed to lower rates again in December. See page 4.  

The 3-month average of job growth rose from 18,330 to 62,330 in September. However, BLS revisions have been consistently negative which may bring this average back toward zero with November’s report. This is another concern since a negative 3-month growth rate has also identified recessions. See page 5. Also note that while the unemployment rate for college graduates is consistently lower than the broader unemployment rate, September’s college graduate unemployment rate of 2.8% is the highest in four years.

The JOLTS report has become widely followed by economists even though it lags regular employment data by a month. The JOLTS report for August showed the job opening rate was unchanged at 4.3%, but the separations rate fell 0.1 to 3.2% and the hiring rate fell 0.1 to 1.9%. See page 3. In short, the pace of hiring is declining, and workers are holding on to current jobs. All in all, the data points to a weakening labor market.

The ISM manufacturing survey for October was down slightly; however, employment and new orders were up for the month. The ISM nonmanufacturing index rose in October from 50.0 to 52.4 with the strongest increases seen in business activity (49.9 to 54.3), new orders (50.4 to 56.2), and employment (47.2 to 48.2). The small increases seen in the employment components of both ISM indices lifted the total ISM employment index back into normal range. This is reassuring since both July and August showed this indicator in negative territory. See page 6.

The NFIB small business optimism index fell 0.6 points in October to 98.2. The decline in the survey was due primarily to a drop in actual earnings which fell from minus 18 to minus 25. Actual sales changes also fell from negative 7 to negative 13. Meanwhile, the uncertainty index declined from 100 to 88. This was an improvement and was the lowest uncertainty reading this year. There has been a strong historical correlation between the unemployment rate and poor sales for small businesses. Both have been rising in recent months, which is another warning sign for the economy. See page 7.

The PPI report for September revealed less inflation than expected and this sparked a market rally. The PPI for finished goods was up 3.3% YOY, the core PPI for finished goods was up 2.85% YOY, and the PPI final demand index was unchanged at 2.7% YOY. Note that all these results are favorable when compared to the PPI’s long-term average of 3.2% YOY. We remain optimistic about longer-term inflation as long as the price of oil remains below $60 a barrel. With oil prices down 13.5% YOY in November to date, and negative on a year over year basis since July 2024, we doubt that there is a worrisome inflationary cycle ahead. Most economists should know this, yet inflation fears continue to plague consumer sentiment. See page 9. In sum, economic data shows little inflation averaging around 3%, job growth declining, the housing market decelerating, and consumer sentiment at recessionary levels. Yet despite all this gloom, the earnings picture is robust. According to S&P/Dow Jones data, the S&P 500 earnings gain over the last 12 months is 12.9% YOY, far better than the 75-year average of 8.1% YOY. See page 10. And the 12-month forward earnings yield for the S&P 500 is 4.6%. When coupled with a dividend yield of 1.2%, this 5.8% total yield is quite attractive relative to the 10-year Treasury bond yield of 4.0%. We continue to believe that analysts have underestimated both GDP and earnings growth for this year and into 2026. While the S&P 500 index is up 15% year-to-date, earnings are also up 13%, and this means that there has been little multiple expansion this year. We remain a buyer of stocks on dips.     

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This will be the last US Strategy Weekly until November 25, 2025. Dudack Research Group will be on vacation.

To date, 2025 has not followed traditional seasonal patterns, which is an interesting thought as we move into what tends to be the best period of the year on a seasonal basis. According to the Stock Trader’s Almanac, the first week of November is usually a good time for equities. And since 1950, November has ranked as the best performing month for the S&P 500 index, followed by December, which is the third best performing month. November has scored an average gain of 1.87% since 1950, with December averaging an increase of 1.43%, just behind April’s 1.47%.

However, some of Wall Street’s top executives, including Goldman Sachs’ David Solomon, Morgan Stanley’s Ted Pick, and Citadel’s Ken Griffin, triggered one of the biggest one-day declines in a month this week. Speaking at the Global Financial Leaders’ Investment Summit in Hong Kong, they cautioned that equities could see a 10-15% correction over the next year due to stretched valuations. Not long ago, JPMorgan Chase CEO Jamie Dimon warned of a significant stock market correction in the next six month to two year timeframe, citing factors including geopolitical tensions. These CEOs are not alone, many people are warning about the possibility of a stock market bubble; however, these warnings are not the characteristics of a bubble top. In fact, it is quite the opposite. Bullishness tends to be very high at the top of a bubble market.

In short, the weakness seen in equities this week is good news. So is the article in the Wall Street Journal regarding Yale Professor Robert Shiller’s valuation model. Shiller’s tool, called the CAPE (Cyclically Adjusted Price Earnings) PE ratio looks at 10 years of earnings and adjusts them for inflation to cover an entire business cycle. As the WSJ noted, this PE recently broke above 40 for only the second time in history. The previous time being the 1997-2000 bubble period. See page 7.

This sounds ominous but it is worth noting that the current 10-year period in Shiller’s model includes the weak earnings seen during the pandemic. The economy was totally shut down. The sharp decline in earnings in 2020 explains why Shiller’s earnings base is low and the CAPE PE looks higher than average. But the main criticism we have of Shiller’s CAPE PE at this juncture is that the business cycle of the last 10 years may not be representative of the upcoming ten years. AI is one reason we expect efficiency and margins to improve. Another important factor in terms of earnings power is that this administration has instituted a tax policy that allows full depreciation of capital expenditures in the taxable year. This is true for businesses large, small, and entrepreneurial. Not only does this inspire more business investment, but it improves economic activity and earnings growth. A third factor is that President Trump’s tax policy should lower taxes for middle income households, suggesting more consumption and economic growth in future years. In our view, the next ten years may not be comparable to the last ten years; yet this is the basis of the Shiller model.

Last, but far from least, even if the CAPE PE proves to be a useful valuation guide, keep in mind that earnings have been far better than expected in 2025. This week the S&P Dow Jones consensus earnings estimate for calendar 2025 was $261.56, up $3.70 for the week. The earnings forecast for 2026 was $304.11, up $1.52. Similarly, the LSEG IBES estimate for 2025 is $268.01, up $0.62, and the 2026 estimate is $305.36, up $0.33. The IBES estimate for 2027 is $348.17, up $1.19. And though PE multiples are rich, the forward earnings yield of 4.5% and dividend yield of 1.2% is competitive to a 10-year Treasury bond yield of 4.1%.

Perhaps the most compelling factor in terms of earnings is that the 12-month sum of operating earnings currently shows a gain of 12.0% YOY, which is 48% higher than the 75-year average of 8.1% YOY. See page 5. The bottom line is that valuation models that are based on historic earnings may look stretched, but earnings growth continues to surprise to the upside. Moreover, we expect this trend will continue for several quarters or years to come. This means that as equity prices move higher, earnings are also rising, and as a result, PE’s have remained relatively stable in 2025. And for those who worry that the equity market is in a bubble, note the current S&P 500 trailing operating PE multiple is now 26.2 times, which is rich, but at recent market tops, or at the 2000 peak, this trailing PE was at least 30 times earnings. If the market were to reach 30 times our 2025 earnings estimate of $270 it would take the S&P 500 to 8100. In short, it is too early to be bearish, even if a bubble is forming. 

And while we sense a wave of pessimism regarding financial markets, it is important to remember that the biggest problem that faced the US in 2025, in our opinion, was runaway deficits. The potential growing supply of Treasury debt hung heavily over the credit markets. In this regard, it is noteworthy that this week the US Treasury Department revised its borrowing estimate for the current quarter to $569 billion, down from $590 billion, due to a higher starting cash balance. Secretary Scott Bessent has been a proponent of President Trump’s tariff policy as one of several methods to raise revenue and lower debt. Bessent has stated that his goal is to get the annual deficit to GDP ratio back to the normal 3% level from the unsustainable 7% level seen at the end of January 2025.

In short, we remain long-term bullish and believe there may be a correction of 10% or more ahead, but it is more likely to materialize in the first quarter of 2026. In the meantime, we would be buyers of dips.

There is little economic data available this week due to the government shutdown, but ISM surveys are reporting. After rising to 49.1 in September, the ISM manufacturing index returned to 48.7 in October. Several financial headlines noted that this ISM index has been below the 50 level — in contraction — for eight consecutive months. This is true; but more importantly, the index has been under 50 for 33 of the last 36 months, not just this year! In other words, 2025 was not a new deceleration in the manufacturing survey but simply a continuation of the trend seen over the last three years. The details for September were mixed, but the production index was one of the weakest factors, falling 2.8 points to 48.2. Employment rose 0.7 to 46.0; still, the index continues to languish below the 50 breakeven level. See page 3. The ISM nonmanufacturing index will report later this week. There were signs of weakness in several technical indicators this week. In particular, the 10-day average of daily new highs and daily new lows tends to define the trend. This week the number of daily new highs fell to 330 while the average of daily new lows rose to 114. This shift has moved this indicator from bullish to neutral. At least 100 new highs per day are deemed bullish; conversely 100 new lows per day are a sign of a bearish trend. The current combination is mixed. Our 25-day up/down volume oscillator is at minus 0.20 this week, down a bit, but still neutral. This indicator should reach overbought on each new market high to indicate that the volume in advancing stocks exceeds volume in declining issues. However, the last overbought confirmation seen in this indicator was in July. The absence of an overbought reading for nearly four months is a signal of a potential correction

Gail Dudack

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The DJIA, S&P 500, and Nasdaq Composite index made record highs on October 28, 2025, and the Russell 2000 index hit a record high one day earlier, on October 27, 2025. Year to date, the gains in the broad indices are DJIA 12.2%, S&P 500 17.2%, Nasdaq Composite Index 23.4%, and Russell 2000 12.4%. And though the technology-heavy Nasdaq Composite is leading the stock market with a gain of 23.4%, the advance in the equity market has been broad based.

The confirming breadth of the market is also seen by the new all-time high recorded by the NYSE cumulative advance/decline line on October 27. So, as we shift into the three most favorable months of the year for equities, the technical picture of the equity market remains bullish. The only minor technical issue we have with the stock market is that NYSE daily volume has been below its 10-day average for six of the last trading sessions. One likes to see volume increase on rallies to new highs. Plus, our 25-day up/volume oscillator continues to languish in neutral territory. To confirm these new highs, it is necessary for the oscillator to move into overbought range for a minimum of five consecutive trading days. The last time this occurred was in July. See pages 10-11. The neutral reading in this indicator suggests that volume in declining stocks is equal to that in advancing stocks, a sign of churning.

The backdrop for the market is good. We believe the Fed will continue to lower interest rates this year and are expecting another 25-basis point cut this week. The Wall Street mantra of “don’t fight the Fed” has been a useful guide in the past since a dovish Fed has typically been bullish for stocks.

The fiscal backdrop for the economy, consumer, and equities is also good. The One Big Beautiful Bill, which allows for immediate depreciation of capital expenditures is stimulative to Corporate America and is particularly helpful to small businesses. Moreover, we expect the first half of 2026 will be positive for many households who will experience lower taxes due to an increase in the standard deduction, an increase in the child tax credit to $2,200 per child, no tax on tips and overtime, and a deduction of up to $10,000 for interest on an auto loan for a US-made vehicle. 

Equally important is the fact that each earnings season of the year has brought a multitude of positive surprises. According to LSEG IBES, as of October 28^th, with 180 of the S&P 500 companies reporting third quarter earnings, 86.7% exceeded analysts’ expectations. This is compared to the long-term average of 67%, and the prior 4-quarter average of 77%. Earnings are rising but so are equity prices, consequently valuation has been a hurdle. If we use the S&P Dow Jones consensus earnings forecasts for 2026 of $302.58 with the recent SPX close of 6890.89, we get a PE ratio of 22.8. This is high, but PE ratios and inflation tend to have an inverse relationship that has been a valuable tool. So, if we add 3% inflation to this PE, the result is 25.8, the highest since August 2022 and above the standard deviation range (see page 10).

However, this index is still below the 30 level seen at the peak of the market in early 2022. More importantly, bubble markets, like those seen in 1997 to 2000, drove this “PE plus inflation” index to 42 in March 2000. In other words, if one thinks the market is forming a bubble, it is too early to get too bearish.

Another way to value equities is to compare the S&P 500’s earnings yield to the 10-year Treasury yield. The 10-year Treasury yield is currently 3.99%. The S&P’s earnings yield is 4.4% based on 2026 earnings and 3.7% on 2025 earnings. Adding the 1.2% dividend yield creates a total earnings yield for equities of 4.9% (2025) or 5.6% (2026), relative to the Treasury bond. Either way, equities look undervalued to bonds, particularly if interest rates continue to fall. In short, the liquidity backdrop for equities remains bullish.

Headline CPI rose 0.3% in the month of September, according to the BLS, and this lifted the year-over-year increase in the index from 2.9% to 3.0%. Core CPI, which excludes food and energy, rose 0.2% in the month and increased 3% YOY, which was a decline from the 3.1% YOY seen in August. The broad energy index was a major factor in September’s headline increase since it jumped from 0.2% YOY in August to 2.8% YOY in September.

Food prices rose 3.1% YOY in September versus 3.2% YOY in August, but the meats, poultry, fish, and eggs index was significant with a 5.2% YOY rise. Note, however, that while both CPI and core CPI are well above the Fed’s target of 2% YOY, both remain below the long-term inflation average of 3.7%. See page 3.

The good news in the September report was the steady deceleration in service sector inflation. Note that the service sector is important since it represents nearly 64% of the CPI and the good news was that prices rose 3.6%, down from 3.8% in August. The index for owners’ equivalent rent, representing 26.2% of the CPI index, rose 3.8%, down from 4.0%. The problem areas were motor vehicle maintenance and repair up 7.7% YOY, tenants’ and household insurance up 7.5% YOY, used cars and trucks up 5.1% YOY, fuels and utilities up 5.8% YOY, and other goods and services up 4.1% YOY. See page 4.

The source of energy inflation is not coming from rising commodity prices, as is typical. The energy commodity index was minus 0.4% YOY in September, up from minus 6.2% YOY in August, but still declining. However, the CPI’s energy index was still up 2.8% YOY, up from 0.2% YOY a month earlier. One of the problems is utility (piped) gas service which rose 11.7% YOY, down from 13.8% YOY in August, but still high. Growing international demand is boosting natural gas prices, and 40% of US electricity generation comes from natural gas, according to the Institute for Energy Economics and Financial Analysis. But gas service prices are also affected by costs for pipeline maintenance and replacement, and regional demand and supply factors. Regional energy demand is also being distorted by AI infrastructure energy usage. This is a major issue. See page 5.

Households, particularly low income households, are negatively impacted by the rising cost of energy services. The household energy price index rose 6.2% in September, down from 7.4% YOY in August but still extremely high. Along with utility (piped) gas service, this index is heavily weighted by electricity, up 5.1% YOY and fuel oil, up 4.1% YOY, in September. The other burden on households is the 7.5% increase in tenants’ insurance and 4.1% increase in household furnishings and operations. See page 6.

Conference Board consumer confidence fell one point in October to 94.6, from an upwardly revised 95.6 in September. The present index was 129.3, up 1.7 from an upwardly revised 127.5, and the expectations index fell 2.9 to 71.5, from an upwardly revised 74.4. The second estimates for October’s University of Michigan sentiment indices were all lower. The headline index is now 53.6, down 1.5 from September. The present conditions index is 58.6, down 1.8 and the expectations index declined 1.4 to 50.3. The University of Michigan sentiment indices have been in recession territory for most of the last five years, which makes them irrelevant as a tool, in our opinion. See page 7.

Gail Dudack

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According to a Reuters/Ipsos poll, President Donald Trump’s approval rating is down 5% from when he took over the White House in January. Yet even though Americans blame Republican lawmakers (50%) more than Democrats (43%) for the government shutdown, Trump’s approval rating is up 2% to 42% from prior to the shutdown. For perspective, the President’s rating has vacillated between 40% and 44% since early April.

It should not be a surprise that Trump’s approval rating has gone up, not down, during the shutdown. Except for the roughly 3 million people paid by the federal government (2.9 million civilian employees and 1.3 million active-duty military personnel) most people have been unaffected by the shutdown. And while most investors may not be aware of this, the President only has control over foreign affairs and American defense and has little to no power over budgets or shutdowns.

President Trump does have some influence, but most of it comes from the slim Republican majority in Congress. However, a slim majority is insufficient to pass a real budget or to prevent a federal government shutdown. Most legislation, including regular appropriations bills, requires a simple majority in the House, but 60 votes in the Senate to overcome a filibuster and pass. The Republican party currently holds 53 seats in the Senate and therefore cannot prevent a shutdown.

Where President Trump is using his influence is in global affairs and trying to find peace in the Middle East and in Europe. Yet while a Middle East peace accord was signed in Egypt on October 13, 2025, it is becoming increasingly clear that Hamas has no real desire for reconciliation, and Middle East peace seems tenuous. In Europe, Russian President Putin appears unwilling to find a solution to end the war with Ukraine and the planned Putin-Trump summit is now on hold.

Nevertheless, there are several reasons to be bullish on equities. The WTI crude oil future (CLc1 – $57.56) is below the psychological $60 level for the first time since May of this year. The oil future has not remained below $60 consistently since February 2021, i.e., during the pandemic. We believe the price of oil is significant for the inflation trend and while it may not show up in the CPI data expected later this week, it will be a positive factor in coming months. In line with lower oil and gasoline prices, it is also significant that the 10-year Treasury bond yield is below 4% for the first time in over twelve months. Lower inflation and lower interest rates give a positive boost to economic activity, and this is apt to show up in coming months and quarters.

In addition, third quarter earnings season is in full force, and the results continue to surprise to the upside. Most notable was the report from General Motors (GM – $66.62), where quarterly adjusted earnings per share dropped to $2.80, but easily beat analysts’ expectations of $2.31. More importantly, the company reduced its tariff expectations and raised its annual profit forecast. According to LSEG research, of the 58 companies in the S&P 500 that have reported earnings to date, 86.2% have reported earnings above analyst estimates. This compares to a long-term average of 67.2% and prior four quarter average of 76.5%. In short, this could be another quarter of positive earnings surprises. As we have often noted, analysts have been too pessimistic about the economy, tariffs, and earnings. And although PE multiples are rich, the forward earnings yield of 4.5% and dividend yield of 1.2% compare well to a 10-year Treasury bond yield of 3.98%. Plus, the 12-month sum of operating earnings shows a gain of 10.5% YOY, better than the 75-year average of 8.1% YOY. See page 7.

Despite a lack of normal economic releases there were good reports this week. In October, homebuilder confidence increased 5 points to 37, according to the National Association of Home Builders’ Housing Market Index. All components of the index were higher, with current sales rising four points to 38; next six month sales rose nine points to 54; and current traffic increased four points to 21. The fed funds rate cut in October, coupled with the dovish statements by Fed Chairman Jerome Powell, appears to have lifted the spirits of homebuilders. As we have already noted, interest rates have been declining, and this is having an immediate impact on the housing market. September Inflation data will be reported by the BLS at the end of the week and good news could also help sentiment and move stock prices higher. See page 3.

The federal government’s fiscal year 2025 concluded on September 30, and Treasury data indicates that the month of September closed with a $198 billion surplus. Nevertheless, the fiscal year ended with a deficit of $1.775 trillion, down 2.4% from the $1.817 trillion in fiscal year 2024; but still high. Even so, it is worth noting that the Trump administration began four months into the 2025 fiscal year with the deficit already at $840 billion. This means the 2025 deficit was running at $210 billion per month compared to the last eight months of the fiscal year when deficits averaged $117 billion per month. In short, 47% of the fiscal 2025 deficit materialized in the first four months of the fiscal year. This suggests that progress is being made, albeit slowly. However, most economists are only looking at CBO estimates for future deficits which imply that gross federal deficits will grow at a steady rate in the future. We doubt this will prove to be accurate, which means most economists remain too bearish. See page 4.

Bending the curve on deficits is critical since the trend in post-pandemic federal debt is not sustainable over the long term. Debt issuance was $1.96 trillion in fiscal 2024 and $1.973 trillion in fiscal 2025. These levels of debt issuance require major increases in demand for US Treasuries to offset supply. Gross federal debt was $37.2 trillion at the end of September, according to the CBO, and 69% was held by the public. Only 12% was held by the Federal Reserve, down from 19% in 2021 and the remaining 19% was held by federal government accounts. Pressure on the US Treasury market has declined since the Fed indicated it may have reached the end of its quantitative tightening cycle. This helps the supply/demand balance. See page 5.

During the Covid pandemic, and with the mandated shutdown of businesses, gross federal debt surged $4.2 trillion as the federal government gave financial assistance to workers and shuttered businesses. However, gross debt continued to increase over $2 trillion per year in 2022, 2023 and 2024, more than the annual increases seen during the recession years of 2008-2010. This spending precedent, even during an expansion, will be difficult to reverse since many Americans are now accustomed to government support. Since discretionary spending has already been reduced to 6.3% of GDP from 9.1% in 2010, this administration has the difficult job of trying to reduce mandatory spending to balance the budget. Hopefully, a program to reduce fraud and waste in programmatic spending can succeed. See page 6. The NYSE cumulative advance/decline line made a new high on October 21, 2025, which is a bullish confirmation of the recent highs. See page 10. Notably, last week’s AAII survey showed bullishness dropped 12.2% to 33.7% and bearishness jumped 10.5% to 46.1%. Bullishness is below average, and bearishness is above average this week indicating no exuberance on the part of the public. This is positive. See page 11. We expect volatility will continue but would be a buyer of any weakness.

Gail Dudack

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Equities tumbled on October 10, with the Dow Jones Industrial Average losing 879 points, shortly after President Trump threatened 100% tariffs on Chinese goods. Trump’s action was in response to Beijing imposing controls on the export of rare earth minerals and the tit-for-tat between these two world powers made investors fear the start of a real trade war. Gold and silver also soared to new heights, igniting debates on whether these were bearish safe haven trades. But while most investors were talking about equities, gold, and silver, it may be chaos in the cryptocurrency markets that proves to be the important event of the weekend.

Bitcoin plummeted from $123,000 to $107,000 between midday Friday and early Saturday morning and the reverberations were felt throughout the cryptocurrency world. According to Yahoo Finance, as falling prices forced leveraged positions to unwind on a variety of exchanges, the crypto market saw its largest liquidation wave on record. Roughly $19 billion of crypto positions were liquidated in 24 hours. Some say this is good news since it unwound the leverage in the crypto market; however, the craziness may not be over. Crypto Economy (*www.crypto-economy.com) writes that a famous trader opened a massive $163 million Bitcoin short position on the Hyperliquid platform on Sunday, October 12. This trader, known as the “insider whale”, became famous for making $192 million by shorting Bitcoin before the 2022 crypto market collapse. This “insider whale” position, which has 10x leverage (a fairly commonplace leverage ratio in the crypto world), also has a liquidation level set at $125,500. Bitcoin (BTC=) is currently trading at $113,242.09.

We are not experts in cryptocurrency, but money is fungible, and leverage in one area of the financial arena can affect other markets. And while leverage in crypto currency is wreaking havoc in that market, the leverage in the equity market is growing as well. Margin debt is only one form of leverage, however, in September, margin debt rose to $1.126 trillion, a 6.3% increase for the month and this compares to a 3.4% increase in the Wilshire 5000 index. We compare monthly increases in margin debt to the Wilshire 5000 or market capitalization since large increases in margin versus small increases in equity prices is a pattern that has preceded some market peaks. (It suggests more leverage is moving equity prices less.) Margin debt is now 1.69% of total market capitalization, not a huge percentage, but the highest since May 2022. See page 3.

Another form of leverage is the growth and widespread use of ETFs. In the US, ETF industry assets reached a record $12.70 trillion at the end of September, surpassing the previous high of $12.19 trillion set in August 2025. This level may seem small compared to total equity market capitalization of $66.5 trillion as of September, but the ETF universe has grown from modest beginnings to 18% of market capitalization and it is worth monitoring. ETFs are a growth segment of the market and represent significant leverage.

Leverage and late-stage bubbles tend to go hand in hand. However, we do not believe equities are in a late-stage bubble. History shows that bubbles are often a ten-year process, and we are only several years into the AI revolution. Equally important, we expect corporate earnings will continue to surprise to the upside – and that is the opposite of a late-stage bubble characteristic. Nevertheless, it is important to monitor all risk factors.

Given the current debate about the equity market being in a bubble, it is worth looking at historical annual performance. Major peaks such as those seen in 1972 or 2000 were followed by several years of negative equity performance, i.e., multi-year bear markets. Note that there were 27 years between these major peaks, which in stock market terms suggests a new generation of investors drove the advance. This is another characteristic of a bubble. If one counts 27 years from the 2000 peak, it suggests a major equity peak may appear in 2027. In addition, annual equity performance shows that there tends to be a pattern of less significant lows roughly every four years. The last negative year was in 2022, suggesting a low (but not necessarily a bear market low) could appear in 2026. All in all, history tends to repeat but is not precise. In our view, it would not be a surprise to see a correction of 10% or more in 2026, but if equities are indeed forming a bubble, we think it is still in the early stage of one. See page 4.

Seasonality has not been a good guide for equity performance this year, but yearend seasonality tends to be the strongest and most reliable. September tends to be a weak month for equities and October tends to be volatile, but a significant low often appears in October. A low in October is followed by November, December, and January, which have been among the three best performing months of the year historically. And since we believe analysts are still too pessimistic about earnings, and third quarter earnings season is starting off well with positive surprises from financial stocks, we believe there is reason to be a buyer of weakness.

The NFIB Small Business Optimism Index declined 2 points to 98.8 in September. Five of the 13 components that we monitor fell, four were unchanged, and four increased. Actual sales changes have been in negative territory since June 2022, but in September the index rose from minus 9 to minus 7. It was minus 20 in October 2024. It is currently at its best level since March 2023, or in 30 months. See page 5. On the positive side, hiring plans increased 1 point to 16, and job openings were unchanged at 32. A bad omen was that plans to raise prices rose from 26 to 32. This may be linked to the fact that sales expectations fell from 12 to 8. However, the most disturbing index in the survey was the outlook for general business conditions, which fell from 34 to 23. In line with this, the outlook for expansion fell from 14 to 11. See page 6.

The preliminary data for the October Michigan Consumer Sentiment index shows the headline index edging down from 55.10 to 55.0, while the present conditions index rose from 60.4 to 61.0 and the expectations index fell from 51.7 to 51.2. Once again, expectations are bringing sentiment down, but present conditions remain stable to higher. This pattern has persisted since April. October data will be revised and perhaps the Egyptian Peace Summit will improve sentiment. See page 7.  

From a technical perspective, the 25-day up/down volume oscillator is at 0.66 and relatively unchanged this week. Even after the October 10 selloff, this indicator remains neutral. However, the last positive readings in this indicator were the one-day overbought readings of 3.15 on July 3 and 3.05 on July 25. This means that this volume breadth indicator is yet to confirm the string of recent new highs made by the popular indices from August to date. To do so, the oscillator should record an overbought reading of 3.0 or higher for a minimum of five consecutive trading days. At present, this indicator suggests advancing volume has been weak and the longer this disparity continues, the greater the risk is that equities experience a near-term pullback. See page 10. *https://crypto-economy.com/famous-trader-opens-massive-163m-bitcoin-short-on-hyperliquid/

Gail Dudack

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It is interesting, and perhaps important, to watch how the stock market deals with the absence of government surveys, and in particular, information regarding both employment and inflation. These releases, plus FOMC meetings, have been the main sources of either angst or exuberance for investors over the last year. And since third quarter earnings season has not yet started in earnest, investors are relatively void of action points. However, to date, investors have not been worried about the shutdown, or a lack of data, and for reasons we explained last week. (Calm not Chaos, October 1, 2025)

Meanwhile, outside US borders, there have been changes. Sanae Takaichi, a hardline conservative and proponent of low interest rates and fiscal spending, was recently elected leader of the ruling party in Japan. Takaichi, an admirer of Margaret Thatcher, has called for a stronger military, promotion of nuclear fusion, cybersecurity and tougher policies on immigration. The election prompted a selloff in the yen and domestic bonds and sent Japanese stocks to record peaks.

Conversely, France’s President Emmanuel Macron is facing immense pressure to resign or hold a snap parliamentary election to put a stop to the never-ending political turmoil that has forced the resignation of five prime ministers in less than two years. French Prime Minister Lecornu recently held last-ditch talks to form a new government, but this failed, and he resigned. France, the second largest economy in the eurozone, is crippled by a combination of unsustainable debt and unions and factions that rebel at the thought of budget cuts. In our opinion, this scenario is important and has the earmarks of the Greek sovereign debt crisis. The Greek crisis became evident to all in 2009 and led to a joint European Union, International Monetary Fund, and European Central Bank bailout in 2010. The collapse of Greek sovereign debt threatened the stability of the European Union and many banks around the world, and the aftermath left Greece impoverished for over a decade due to externally imposed austerity measures from its creditors. We should keep an eye on France.

Meanwhile, in the absence of the Bureau of Labor’s release of September job data, there are a few different data points we can monitor. ADP releases monthly data on the private sector job market and this report indicates the private sector lost 32,000 jobs in September. The greatest job losses were in the service sector and in establishments with 20 to 49 employees. Conversely, large companies increased the number of employees. Note that ADP’s September report incorporated a preliminary re-benchmarking of the National Employment Report based on the 2024 results from the Quarterly Census of Employment and Wages release. ADP also noted that its August 2025 employment number was revised from 54,000 to negative 3,000 due to this re-benchmarking. (The BLS will do its re-benchmarking with the January employment report released in early February 2026.)

Both ISM manufacturing and nonmanufacturing surveys were reported in recent days and both surveys include employment indices. The ISM employment indices were 45.3 in manufacturing and 47.2 in nonmanufacturing. The total of these two employment indices equaled 92.5, which is up from the 90.3 level seen in August. The importance of the combination of these two employment indices is that whenever the sum has dropped below the standard deviation range, the economy has been in a recession. This index did fall below the standard deviation range in the months of September 2024, March 2025, July 2025, and August 2025. In short, the ISM employment surveys have implied the US economy has been waffling near recession employment levels for the last 12 months. The good news is that there was improvement in September. See page 4.

The ISM surveys also showed that the main manufacturing index increased 0.4 points to 49.1 and the nonmanufacturing index fell 2 points to 50. In terms of business activity, manufacturing rose 3.2 points to 51.0 and nonmanufacturing fell 5.4 points to 49.9. This was an unusual shift from the pattern seen for most of the last two years in which nonmanufacturing, or service, outperformed manufacturing. In the manufacturing survey, six of the 11 components fell in the month and eight were below the 50 breakeven level. In the nonmanufacturing survey, seven of 11 components fell in the month and six were below the 50 breakeven level. New orders declined significantly in both ISM surveys with this index falling to 48.9 in manufacturing and to an above benchmark 50.4 in nonmanufacturing. Conversely, backlog of orders rose considerably, to 46.2 in manufacturing and 47.3 in nonmanufacturing. All in all, both reports reflected sluggishness in business activity. The most worrisome fact was the weakening trend in the nonmanufacturing sector since the service sector is currently the most important segment of the US economy.  

There were two releases on consumer credit this week. The Quarterly Report on Household Debt and Credit, released by the Federal Reserve Bank of NY, indicated that total household debt increased by $185 billion to reach $18.4 trillion in the second quarter. Mortgage balances grew by $131 billion, to $12.94 trillion at the end of June. Auto loan balances also increased by $13 billion to $1.66 trillion. Transition into early delinquency held steady for nearly all debt types; but the exception to this was for student loans. Missed federal student loan payments were not reported to credit bureaus between the second quarter of 2020 to the fourth quarter of 2024 but they are now appearing in credit reports; as a result, delinquency rates are on the rise. In the second quarter of 2025, 10.2% of aggregate student debt was reported as 90+ days delinquent. This was a significant jump from the 7.7% reported in the first quarter. Credit card 90+ days delinquent remain the highest at 12.27% of total loans, but this was down slightly from the 12.31% reported in the first quarter of the year. See page 5.

Separately, Federal Reserve monthly data of total consumer credit showed credit was declining year-over-year from December 2024 to February. This is another sign of a recession. But total consumer credit has been growing modestly since February. The exception is revolving credit, which continues to contract and was down 2.5% YOY in August. This is a sign that consumers may have tapped out credit card lines which is another sign of financial stress.

From a technical perspective, the stock market remains in a bull market. The NYSE cumulative advance/decline line made a new high on October 6, 2025, and the 10-day averages of new highs and lows remain consistently bullish. The only indicator that has failed, to date, to confirm the string of new highs in the popular indices is the 25-day up/down volume oscillator. It has remained neutral since July, and this implies that volume in advancing stocks has been equal to that of declining stocks. In a bull market, volume typically increases in advancing stocks and is a sign of strong and increasing demand. This strong buying results in a long overbought reading. The absence of a strong overbought reading suggests that, lacking strong buying, the August-September rally is vulnerable to a pullback. Nevertheless, we would be a buyer of any weakness since the long-term bull market trend remains intact. As we noted earlier, it is important to see how the equity market performs in the absence of any significant catalyst or new information. In our opinion, the market’s action has been solid, and we believe this is due to the deregulation and fiscal stimulus that will help companies grow and low tax rates to help middle income families. In turn, this will drive corporate earnings and generate positive earnings surprises.

Gail Dudack

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As the US faces a government shutdown, the financial media seems baffled by the apparent calm in the financial markets. Perhaps the media enjoys chaos, or likes to incite chaos, or perhaps they are overly sensitive to or impacted by the harsh political banter surrounding this issue. Nevertheless, there are several simple and logical reasons for the market’s calm.

First, each year Congress must pass, and the President must sign, a budget or a continuing resolution (CR) for the next fiscal year. This consists of 12 appropriations bills, one for each Appropriations subcommittee. Without a budget or CR, federal agencies must discontinue all non-essential discretionary functions until new funding legislation is passed. For example, contractors to the federal government may not get paid until a bill is passed. However, while the absence of a budget or CR directly impacts discretionary spending, it does not impact mandatory spending. Mandatory spending includes interest payments on debt, Social Security, Medicare, Medicaid, salaries for Senators and Representatives, and other personnel deemed essential. All essential functions of the government continue. Postal workers and military continue to work but salaries are delayed until a CR is passed.

Second, a continuing resolution bill usually includes an increase in the debt limit. However, the budget reconciliation law enacted on July 4, 2025 (known as H.R.1 – One Big Beautiful Bill Act) increased the debt limit by $5 trillion to $41.1 trillion. This was an important inclusion in the July 4^th bill since it allows the US Treasury to continue to issue debt and pay all its mandatory obligations without fear of reaching the debt ceiling in the near term. In short, it prevents a US default. Had the debt ceiling not been lifted in the One Big Beautiful Bill Act, it could have been breached, and the US Treasury might have had to employ extreme and unusual means to pay interest on its debt, if possible, and the prospect of a default would have thrown the financial markets into chaos. However, default is not a risk today, and the financial markets are calm. Note that debt held by the public was $30.1 trillion and intragovernmental debt was $7.3 trillion, for a total outstanding debt of $37.4 trillion, as of September 3, 2025.

The Bureau of Labor Statistics announced this week that in the event of a government shutdown the monthly employment report scheduled for Friday will not be released. In normal circumstances, this announcement would have gone unnoticed; but given the intense focus on monetary policy this year, data on employment and inflation are deemed crucial. However, in our opinion, it is not that crucial. Employment data has been notoriously “inaccurate” in recent years and the BLS already announced that the annual benchmark revision to the March 2025 establishment survey will lower employment by 911,000 jobs. Unfortunately, this estimate will not be finalized until January’s employment report published in February 2026. In the interim, since we know data is about to be dramatically revised should we care about Friday’s employment report? And in terms of monetary policy, the next FOMC meeting on October 28-29, is nearly a month away. In the absence of BLS data, there will be employment information from ADP to ponder. All in all, there will be inconveniences due to a government shutdown, but in our opinion, it is unlikely to impact financial markets.

Economic news was notably better than expected this week. Inflation, income, and real personal spending all came in at the higher end of expectations. In August, personal income rose 5.1% YOY up from 4.9% in July. However, we noticed that wages and salaries rose 4.9% YOY, which was down from 5.3% in July, and we will monitor this in coming months. Farm income, which can be volatile, increased in August and made most of the difference in wages. Disposable income increased by 4.5% YOY in August, down from 4.7% in July. But the most important statistic, real personal disposable income, increased by 1.94% YOY, up slightly from 1.88% YOY in July. Personal consumption expenditures rose a healthy 5.6% YOY, up from 5.2% YOY in July. Underlying data showed that the August increases in spending were primarily in durable goods and are unlikely to continue at this pace. See page 3.

The final estimate for second quarter GDP was 3.8%, the second upward revision for the quarter. This strong GDP number compares to a decline of 0.6% in the first quarter. However, the quarter-to-quarter swing in economic activity came primarily from imports. A sharp drop in imports in the second quarter was a counter swing to a surge in imports in the first quarter. Vendors built up inventories prior to tariffs expected in April. In terms of the trade impact of tariffs, net exports of goods and services subtracted 4.7% from GDP in the first quarter and contributed 4.8% in the second quarter. Total exports were relatively the same in both quarters, but imports added 5% to GDP in the second quarter, a reversal from the 4.7% subtraction in the first quarter. It may take several more quarters to determine the long-term impact of tariffs on net trade numbers and GDP.

Inventories were also a huge drag in the second quarter. Inventories, which added 2.6% in the first quarter, subtracted 3.4% in the second quarter as vendors reduced inventories. Federal government spending and residential investment were also minor drags in the second quarter. Consumer spending, state and local government spending and fixed investment grew modestly. See page 4-5.

The PCE deflator rose from 2.6% YOY in July to 2.7% YOY in August. This was the highest 12-month rate since April of 2024 and much of August’s acceleration came from food and energy service prices. The PCE deflator for food services climbed 3.1% YOY in August. Imported food products are experiencing the most dramatic price hikes as tariffs are increasingly being passed through to consumers. Although commodity energy prices are down, electricity bills are climbing. Housing and utility services increased by 4.3% YOY in August. A key factor is the surge in demand from the data centers that power artificial intelligence. We expect this trend will persist in coming quarters. See page 6. 

In the month of August, existing homes sales rose 1.8% YOY and new home sales jumped an unexpectedly large 15.4% YOY. New home sales were 800,000 units in August, the highest level since January 2022. The median price for existing homes was $427,800, up 1.9% from a year earlier while the average price was $562,800, up 3.1% YOY. The median price of a new home in August was $413,500, up 1.9% YOY while the average price was $534,100, up 12.3% YOY. New home prices are often volatile, but August’s data suggests the big surge in new home sales took place in higher priced homes. See page 7.

The pending home sales index increased to 74.7 in August, rising 4% over the month, but remaining well below the March 2025 level. Lower mortgage rates may be helping housing demand. The NAR 30-year fixed mortgage rate is currently 6.3%, down from 6.6% at the end of August and down from the 7.04% seen in January. In August, pending sales improved in all census regions except the Northeast; and on a year-over-year basis, pending sales were up 3.8%. Lower mortgage rates, rising home inventories and an increase in median family incomes, are slowly improving affordability. See page 8. Technical indicators maintain their bullish bias this week, though volume oscillators have not confirmed recent highs. This implies some short-term weakness is possible. We would be a buyer on a pullback.

Gail Dudack

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In the first few days of President Trump’s second term, the newly reinstalled President generated news at a head-spinning rate. This week was another one of those head spinning times. In the last two days President Trump proposed raising new H-1B visa fees to $100,000, is seeking an equity stake of roughly 10% in Lithium Americas Corp. (LAC.N – $3.07), a Canadian-based lithium company, as part of the company’s $2.26 billion Energy Department loan negotiation, announced a willingness to assist Argentina with its weakening peso, warned about the safety of paracetamol during pregnancy, canceled a meeting with Democrats who want to add $1.5 trillion more spending concessions to the seven-week continuing resolution, stated that Russia faces “big” economic problems at home and implied this could help Ukraine retake all its occupied lands, and in an historic speech at the UN (worth watching in full) blasted the assembly for its lack of peace efforts, called climate change the “greatest con job” ever, condemned moves to recognize a Palestinian state, and lectured Europe on buying Russian oil which supports Russian warfare on their borders and for allowing mass migration which is ruining European countries and cultures.

Each of these items is worthy of further discussion since each has economic implications. But the most immediate of these is the battle in Congress regarding the seven-week continuing resolution (CR). The House’s Republican-backed bill was rejected in the Senate by a 44-48 vote. A competing CR introduced by Senate Democrats also failed to pass and now Congress has until September 30 to pass a funding proposal in order to avert a government shutdown.

Keep in mind that aside from keeping the federal government running, the House-passed bill would have extended key health care programs that are currently set to expire at the end of this month. These include programs that provide inpatient payments to small, rural hospitals with a high percentage of Medicare patients, telehealth and hospital-at-home flexibilities, and the Cybersecurity Information Sharing Act. However, instead of negotiating, both political parties are blaming the other for a government shutdown, which is beginning to feel inevitable.

In other news, Nvidia Corp. (NVDA – $178.43) announced a $100 billion investment in OpenAI LLC, with the first $10 billion going toward building a gigawatt of capacity using its next-generation Vera Rubin chips. The build-out is estimated to start in the second half of 2026. Perhaps more interesting is the fact that while this announcement triggered a tech rally, it proved to be short-lived, and stocks gave up their gains by the end of the session.

September has a history of being a volatile month, and though it has produced gains so far this year, we would not be surprised if the market took a short pause as it awaits news on a possible government shutdown. Plus, this Friday the BEA will release data on personal income, personal expenditures, and the Fed’s favorite benchmark, the PCE deflator. At the end of next week, the BLS will release the jobs report for September. These two reports will be the basis for what analysts will expect at the next FOMC meeting on October 28-29. At present, we expect another 25-basis point cut in the fed funds rate, but calm inflation and a weak employment report could shift the consensus toward a larger cut. Either way, a dovish Fed should be good for equities. But in the interim, there may be little to drive stock prices substantially higher.

Recently reported housing data reveals a slow but steady deterioration in this important segment of the economy. In July, the total annualized rate for construction was $2.2 trillion, down 2.8% YOY. The residential construction rate was $899 billion, down 5.1% YOY. These numbers represent the sixth consecutive monthly decline in total and residential construction spending. Housing starts fell 6% YOY in August, and single-family starts fell 11.7% YOY. Permits were similarly down 11.1% YOY in total and down 11.5% for single-family units. These represented the worst declines in starts and permits since the third quarter of 2023 and suggest that the housing industry could remain in a slump for the rest of the year. See page 3.

Data for existing and new home sales in August will be reported later this week; but in July, the annualized rate for existing home sales was 4.0 million, up a mere 0.8% YOY. New home sales were 652,000, down 8.2% YOY. The average existing single-family home price was $559,900 in July, up 0.3% YOY; and the average new single-family home price was $487,300, down 5% YOY. Overall, the trends in both residential sales and prices are negative or decelerating and we will look to see if new data supports or stabilizes this trend. See page 4.  

The inventory of existing single-family homes rose to 1.36 million units in July, which equals 4.5 months of supply. This is up substantially from 990,000 units of inventory reported in December, which was 3.1 months of supply. Inventories are up 15% YOY while sales, at 4.0 million units, are roughly the same as a year ago. See page 5.

The National Association of Home Builders confidence survey showed the headline index was 32 and unchanged in September. Present sales were unchanged at 34, sales over the next six months rose 2 points to 45 and traffic of potential buyers rose 1 point to 21. In short, this survey suggests that the weak numbers seen in residential construction in August are likely to continue in September. See page 6.

Import prices for the month of August showed no change on a year-over-year basis, but June and July data were revised lower and July import prices fell 0.6% YOY. Conversely, exports prices rose 3.4% YOY in August, up from a rise of 2.4% YOY in July. This data is before tariff pricing, but it shows that those selling to the US are keeping prices low, whereas US sellers are able to raise prices. Moody’s Analytics has an interesting chart on global CPI which shows worldwide inflation was less than 3.6% YOY in August, down from July, and decidedly lower than the 4.2% YOY seen in January before tariffs were introduced. Moreover, Moody’s reports that Africa leads in inflation at 10.6% YOY, down from 11.3% YOY in July. Again, hard data does not support the view that tariffs are generating inflation.

Consensus earnings estimates continue to inch higher, and the S&P Dow Jones estimate for calendar 2025 is now $258.30 and the LSEG IBES estimate is at $267.86. For 2026, these consensus forecasts are calling for earnings of $302.91 and $304.88 per share. The IBES estimate for 2027 is $345.27, up $1.11 this week. Although PE multiples are rich, in our view the forward earnings yield of 4.5% and dividend yield of 1.2% compare well to a 10-year Treasury bond yield of 4.15%. Plus, the 12-month sum of operating earnings shows a gain of 10.5% YOY, better than the 75-year average of 8.1% YOY. See page 7. Most technical indicators, with the exception of the 25-day up/down volume oscillator, support the bullish view. The oscillator has not confirmed the August-September highs, which suggests a pullback may be ahead. Nevertheless, we would be a buyer of weakness in coming weeks.

Gail Dudack

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The September Federal Reserve meeting is finally here and, in our view, the long-anticipated 25-basis-point cut in the fed funds rate is fully priced into stock prices. Nevertheless, barring some radical change in the economy, it is easy to build a case for 25-basis-point cuts in each of the next two Federal Reserve meetings this year. And since stocks tend to perform well in the six months following the first in a series of rate cuts, many forecasters, us included, are bullish for the rest of the year.

This bullish historical pattern related to Fed rate cuts may be why this September – a month that is typically the worst performing month in the calendar — has been kinder to equity investors than normal, at least to date. But there are a number of roadblocks ahead this month. The fighting in both the Middle East and Ukraine appear far from over and in some ways is growing more dangerous than ever. The fiscal crisis facing France continues, even with the appointment of a new Prime Minister. Fitch’s downgrade of France’s credit rating may be the first of several downgrades, and it is increasing France’s borrowing costs and deepening the crisis. And as President Trump arrives in Britain for an unprecedented second state visit, both the UK and the US face a similar combination of massive debt, weakening economies, and social unrest.

As we discuss this week, the fiscal year ends in September, and the government will shut down at 12:01 a.m. October 1^st without a new law to keep funds flowing. House Republicans are unveiling legislation to fund the government through November 21^st and it add security resources for government officials. But it is unclear if they have the votes to pass it. Democrats are demanding that any spending extension should tackle expiring health care subsidies that are due to expire at the end of the year.

The US debt crisis is real. In fiscal 2024, gross federal debt represented 122% of GDP and the Biden administration estimated this would soon rise to 130%. Debt held by the public (which includes the Federal Reserve but no other government agencies) was 97.8% of GDP in the same period.

Treasury Secretary Scott Bessent has indicated he has a long-term goal of lowering annual deficits to 3% of GDP. However, the administration’s attempt to balance the budget is proving difficult. Even though tariffs and capital gains taxes are adding to Treasury revenue, outlays for Social Security and Medicare are up 8% and 10%, respectively, in fiscal 2025. At the end of August, the 12-month sum of deficits equaled 6.3% of GDP, down from 7.2% in January, but still historically high. See page 3.

And since federal deficits remain large, public debt issuance jumped to $572.8 billion in July and remained high at $439.3 billion in August. (September auctions are estimated to be roughly $150 billion.) Quarterly data from the St. Louis Federal Reserve shows debt in Treasury bills was $5.78 trillion in June after peaking at $6.19 trillion in December. At mid-year this represented 16.4% of total federal debt, down from 17.5% at the end of 2024. The 3-month Treasury bill rate was 4.3% in June and the current 3-month constant maturity rate is 4.1%. More importantly, in fiscal 2024, interest expense represented 3.1% of GDP, higher than the 3.0% of GDP spent on defense. And though fiscal issues are not in the Federal Reserve’s mandate, this helps explain why interest rates are important to the federal deficit and why President Trump would like to see the fed funds rate lower.

In our opinion, the recent statement from the Bureau of Labor Statistics estimating a revision of 911,000 fewer jobs for the 12 months ending in March 2025, is a disturbing development. This means that job growth averaged 70,000 per month for most of 2024 and not the 147,000 as reported. This is certainly a reason for the Fed to be cutting rates.

And while inflation data for August was mixed it should not derail the Fed from lowering rates. Headline CPI rose 2.9% YOY in August, up from July’s 2.7% and the highest since January’s 3.0%. Core CPI was unchanged at 3.1% YOY. Only three segments of the CPI index showed inflation growing at or below 2% in August. Transportation, food away from home, medical care, and other goods and services all showed prices rising more than 3% YOY. However, while housing, with a weighting of 44.4% in the CPI, rose 4% YOY, it continued to ratchet lower. See page 4.

The problems in the CPI are concentrated in the service sector, areas such as motor vehicle maintenance and repair where prices rose 8.5% YOY in August. It is noteworthy that energy commodity prices fell 6.2% YOY in August, but energy services rose 7.7% YOY. While new vehicle prices rose only 0.7% YOY, used car prices rose 6% YOY. All in all, inflation issues do not appear to be tariff related. See page 5.

CPI, PPI, and import price indices have remained below the 3.5% long-term average for nearly two consecutive years; and with the fed funds rate at 4.33% and the PCE deflator at 2.6%, there is room for the Federal Reserve to have not one, but three consecutive 25 basis point cuts this year. See page 6.

Consumer spending was better than expected in August. Total motor vehicle unit sales were 16.5 million in August, up 5.5% YOY. And the impact of auto tariffs is clear from data that shows domestic light weight truck sales rose 12.5% YOY while foreign light weight truck sales fell 1.5% YOY. August retail sales surprised to the upside with headline sales increasing 5% YOY and sales excluding autos up 4.9% YOY. Retail sales for auto and other motor vehicle dealers rose 5.0% YOY in the first eight months of 2025. Miscellaneous store retailers saw sales increase 8.4% YOY in the same period and nonstore retailers had a 6.9% increase in sales year-to-date. See page 7. The consumer appears resilient.

Corporate earnings have also been resilient. In September, the 12-month sum of S&P 500 operating earnings showed a gain of 10.5% YOY. This was much better than analysts expected and is above the 75-year average of 8.1%. And though PE multiples are rich, the current earnings yield for the S&P 500 of 3.5%, when coupled with a dividend yield of 1.2%, comes to 4.7%. This compares well to a 10-year Treasury bond yield of 4%. Moreover, we expect positive earnings surprises will continue in coming quarters. From a technical perspective, the NYSE cumulative advance/decline line made a record high on September 15, 2025 and is bullish. The 10-day average of daily new highs is currently greater than 500, defining a broad-based advance. The AAII sentiment indices are more positive this week with recent readings showing bullishness at 28% and bearishness at 49.5%. This is nearing the 20/50 split that is rare and very positive. The one indicator that remains neutral is our 25-day up/down volume oscillator; and though this week’s reading of 2.00 is closer to an overbought reading of 3.0 or greater, it is still short of a five-day overbought reading needed to confirm the recent market highs. This suggests the volume on the advance in July and August lacked convincing volume, and it leaves the market vulnerable to a pullback. Nonetheless, we would be a buyer on weakness.

Gail Dudack

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French President Emmanuel Macron named loyalist Sebastien Lecornu, 39, a conservative protege, as prime minister on Tuesday, following the collapse of his fourth government in two years. This appointment shows Macron’s determination to hold on to a minority government and a pro-business reform agenda which cuts taxes on business and the wealthy and raises the retirement age. Lecornu’s appointment is unlikely to appease left-wing “Block Everything” participants who are planning to shut down all of France with protests and blockades on September 10. More importantly, as Macron struggles to hold on to his minority coalition government, the country is slowly slipping toward a fiscal crisis. A combination of weak growth, high borrowing costs, and a massive debt burden has resulted in French bonds yielding 3.4%, a higher cost of capital than Greece or Spain, placing French bond rates second only to Italy.

Meanwhile, the US 10-year Treasury bond yield is currently 4.07%, at the lower end of the 4.0% to 4.7% range that contained yields so far this year. And we wonder if this decline in yields is a response to risks seen in the European debt markets or an indication of weaker US growth. Perhaps it is both.

August payrolls grew by a disappointing 22,000 in August and the unemployment rate rose from 4.2% to 4.3%. Moreover, the U6 unemployment rate rose faster from 7.9% to 8.1%. On a year-on-year basis, the establishment survey showed total employment grew 0.9% YOY, below its long-term average pace of 1.7% YOY. The household survey showed jobs growing 1.2% YOY, below its long-term average rate of 1.5% YOY. However, while both growth rates are currently below average, they are nonetheless positive. A positive growth rate is critical to the economy because a year-over-year decline in jobs is an indication of a recession.

But what dominated news this week was the Bureau of Labor Statistic’s announcement that the annual revision to payrolls in the 12 months ending in March 2025 is estimated to be 911,000, which means payrolls were lower than previously reported. More specifically, this indicates that for every month from March 2024 to March 2025, actual job growth was an average of 76,000 jobs less than reported. This annual adjustment was far larger than economists’ expectations and it appears to be the largest revision ever recorded. And this would be the second unusually large negative annual revision in a row. It also implies that the economy under President Biden was much weaker than reported, it suggests the Federal Reserve should have been lowering interest rates and it supports President Trump’s decision that more rigorous leadership is needed at the Bureau. Last, but far from least, it means that the growth rate in jobs over the last year might already be negative! However, that will not be confirmed until next year.

Revisions to government data are normal as new information is accumulated; but unfortunately, these massive revisions are three times larger than normal and as a result, have destroyed confidence in most government data. This is regrettable. See page 3.

August employment data also revealed a number of underlying trends. Over the last twelve months, foreign employment declined by 822,000 workers while native-born employment increased by 2.8 million workers. This is a massive turnaround from August 2024 when native employment declined by 1.3 million workers and foreign-born workers increased by 1.24 million. See page 4. The unemployment rate rose to 4.3% in August but underlying details show a dichotomy in workforce dynamics. The unemployment rate for those with less than a high school degree is currently 6.7% and rising. The unemployment rate for those with a bachelor’s degree or higher is also rising but remains substantially lower at 2.7%. This suggests that the lower end of the employment market is suffering.

The household survey estimates the number of people who are not in the labor force but currently want a job. This group totaled 6.4 million in August, which was not a big change from July, but it was up 722,000 over the year. This category of “currently want a job” represents 6.3% of those currently not in the labor force, up from 5.7% a year ago. According to the BLS, these individuals are not counted as unemployed because they were not actively looking for work during the four weeks preceding the survey or were unavailable to take a job. However, the 6.4 million people who are not in the labor force and want a job is sizeable when compared to the 7.4 million counted as “actively” unemployed. In short, digging through the data we find a pattern of underemployment. See page 5.

In our view, economists should not be surprised by the pending negative revision in payroll data because there has been a growing disparity between the establishment and household surveys since June 2023. While the payroll survey showed a steady increase in jobs, the household survey – which is much broader – suggested job growth was flat during this period. Note that in the last two years, the only increase in jobs in the household survey took place in January 2025 and this was due to the annual Census adjustment to total population! See page 6.

There are two data points we will be watching in coming months to define the strength or weakness in the job market. First, the 3-month moving average of job growth is currently low at 29,330. Should this moving average turn negative it is a definitive signal of a recession. As we noted, economists should be worried because the revision to jobs data next March is likely to result in this number turning negative. Second, the number of people unemployed for 27 weeks or longer displays how easily the unemployed can find work. This number is currently at 1.93 million people and rising. With the exception of the financial crisis of 2008 and the pandemic, a level of 2.0 million has defined a recession. See page 7.

In the US, GDP is closely linked to personal consumption, which represents 68% of our economy. Moreover, 47% of total GDP is personal consumption of services which means the US economy is dominated by the service sector. In August, the ISM nonmanufacturing index rose 1.9 points to 52, which marked the third straight month above 50 for the index. This is encouraging; however, order backlogs were particularly weak, falling 3.9 points to 40.4, below the 40.9 of May 2023, and at their lowest reading since the 40.0 seen May 2009. Note that the sum of the ISM manufacturing and nonmanufacturing employment indices fell below the standard deviation range of 92 to 113 for the second month in a row. A sharp decline in this series has been linked to recession economies. See page 8. All in all, there are many reasons for the Fed cutting interest rates in September.

From a technical perspective, the market improved this week. The NYSE cumulative advance/decline line hit a new high on September 8, 2025 and new highs should continue if the indices continue to move higher. The 10-day averages of new highs and lows is positive. The 25-day up/down volume oscillator is still neutral but moved higher this week. The lack of an overbought reading of 3.0 or higher since mid-July in this oscillator is a technical warning since volume in advancing stocks should exceed volume in declining issues on new highs in a bull market. We will continue to monitor this. September tends to be a dangerous time for equity investors, and this September includes unrest in France, Israel attacking Hamas in Qatar, Russia seeking alliances with China and North Korea, and the possibility of a US government shutdown. However, a rate cut is likely and that, along with relatively good earnings, is a positive for equities. We would be a buyer on weakness.

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