Expect The Unexpected

Things have not occurred as expected this year in either the markets or the economy. Tariffs were expected to push the economy into recession and the Fed was expected to continue cutting interest rates. But alas, life does not

always unfold the way we expect. The inspiration for this week’s musings is the surprise 1994 hit movie "Forrest Gump". Here’s some trivia about the movie:

• The film seemingly came out of no where in 1994. The fiction novel "Forrest Gump" written by Winston Groom sold a paltry 30,000 copies in 1986. The movie grossed more than $678 million at the box office and was the highest-grossing movie ever for Paramount studios until "Titanic" came along three years later. "Forrest Gump" won 8 Oscars (including Tom Hanks as Best Actor) and was nominated for another 7 Oscars.

• By the way, while the book sold only 30,000 copies pre-film, after the movie was released, it sold more than 1 million copies.

• John Travolta was the original choice to play Forrest. He ultimately passed on the role and later stated it was a mistake. Ya think? Bill Murray, Chevy Chase, and Matthew Broderick were all reportedly considered for the role. Winston Groom envisioned John Goodman playing the role. Joe Pesci and Kevin Bacon were considered for Lt. Dan, with the role obviously going to Gary Sinise. Ice Cube and Dave Chappelle were offered the role of Benjamin "Bubba" Blue, but both turned it down. Chappelle thought the film would be unsuccessful and later stated he regretted not taking the role. Hanks became aware of Chappelle's regret and agreed to work with him on "You've Got Mail."

• The studio imposed budget cuts during filming, which led to director Robert Zemeckis and Tom Hanks waiving a large part of their fee in exchange for a percent of the box office. This netted Hanks around $70 million when all was said and done.

• After the film's success, Gary Sinise formed a foundation for injured war veterans, which raises up to $30 million annually to build homes for veterans, financial support for veterans and first responders, and educational support for the families of fallen heroes.

Here's what we've seen so far this week..

Stupid Is As Stupid Does. One of the hallmarks of the film is when Forrest responds to people who question his intelligence based on the things he does with the phrase, "Stupid is as stupid does." Which was apparently something his momma told him.

Well, maybe Mrs. Gump ought to help Fed Chairman Powell at his next press conference. The nonsensical statements uttered by the Fed chairman at this week's presser are funny at best, sad at worst. To begin, at least two Fed governors - Bowman & Waller - dissented with the crowd and called for at least a 25 basis point rate cut. The last time at least two governors dissented with the group was 1993. Dissention in the ranks is not a good look for

Powell. The market did not respond well to Powell's statements as he said, "We have made no decisions about a September meeting" and "Modestly restrictive seems appropriate." The market took this to mean that a September rate cut may be off the table now.

In fact, after Wednesday's presser, futures on Fed Funds show at least a 55% probability of no rate cut in September. Yet, the more puzzling of Powell's comments was when he uttered, "We're still a ways away from seeing where things settle." So, policy is now dependent upon future data that cannot possibly be predicted? If that were not enough, Powell further stated, "Many labor measures are similar to a year ago. Inflation is further from our goal than employment." Inflation as a whole is 0.5% closer to the Fed goal than in September of last year when the Fed cut 50 basis points. If we only look at essentials - phone bill, cereal, gas, coffee - the disparity between the Fed Funds Rate and Essential Inflation is the widest since the 3rd quarter of 2007. I guess Mrs. Gump was right - stupid is as stupid does.

Life Is Like A Box Of Chocolates. Another idiom uttered by Mrs. Gump that Forrest often quoted in the film is, "Life is like a box of chocolates - you never know what you're going to get." That is the truth. Life often throws you a curve ball you can't possibly

expect. That's been the case with investing in 2025. It was said that tariffs would spark a recession and hurt global trade. And yet, we've seen multiple trade deals announced that mostly favor U.S. interests. At the same time, tariff revenue is 2.3 times higher than what it was at this same point last year, while inflation has been largely stable. After last month's increase, the Cleveland Fed estimates that July CPI will come in at +0.2%, but that year-over-year CPI will remain flat at 2.7%. This has perplexed many economists as the U.S. economy has remained steady while customs duties grows.

After slumping in the 1st quarter - due largely to front running of tariffs and build-up in inventories - Gross Domestic Product rebounded in the 2nd quarter. The Atlanta Fed estimated Q2 GDP to come in at +2.4% (before quickly revising that number higher the day before the GDP print - ahem), while both the St. Louis Fed and NY Fed estimated the number to be +1.7%. And yet, the first print of 2nd quarter GDP came in at +3.0%, which is indicative of strong growth in the economy. If tariffs were going to derail the economy, it doesn't look like that was one of the treats pulled from the box of chocolates for 2025.

That's All I've Got To Say.  Finally, whenever Forrest was finished talking about a difficult subject or just didn't have anything left to say, he would tell the listener,

"That's all I've got to say about that."  If only market pundits would take that approach in 2025. A lot of angst is being circulated about Margin Debt in investment accounts. It's true that Margin Debt is a sign that investors are taking too much risk, which typically ends poorly, either in a pullback or recession. However, the latest data is not being examined through a relative lens. If we adjust Margin Debt relative to equity market cap, say the Wilshire 5000 Total Market Index, we see a low level of debt compared to the Dot.com bubble in 2000 and the Financial Crisis in 2008. The market cap of stocks has exploded since those two events, so the absolute level of Margin Debt has to be examined with market cap as a back drop.

As we've mentioned over the past couple of weeks, some softness in equities should be expected as seasonality suggests the next

few months could be underwhelming. Most especially, the month of August is typically negative in the post-election year of a 2nd term president. On average, August is down -3.4% during such a scenario. However, even with those negative August returns in 1957, 1973, 1985, 1997, 2005, & 2013, the full year return for the S&P 500 Index was positive 12.75%. Investors should keep in mind that one month does equal 12 full months of return. There's no doubt market pundits will chime in on a negative month in the market as they attempt to get investors' attention, but longer-term investing warrants listening to a steady voice from a financial advisor/financial planner.

Like Forrest, run market run...

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

Past Performance does not guarantee future results.