Expectation vs. Reality

This year has provided a strong contrast between what investors and consumers expected to happen and what actually occurred. Surveys are not always the best

comparison to hard economic data. The inspiration for this week's musings is the 1987 surprise hit movie, "Can't Buy Me Love". Here’s some trivia about the movie:

• The movie was released near the end of the summer in 1987, which is not a great time for a movie release. The extremely meager budget of $2 million is owed to the relatively unknown, up-and-coming cast of actors. The movie earned more than $31 million at the box office.

• The original script written by Michael Swerdick, came from an idea he got while at work. He was a mailroom clerk at a talent agency. One of the agents invited him and other mailroom staffers to a party. When he showed up to the party with an attractive female date, the guests took notice and suddenly his status at the agency improved right away.

• It would seem we can't have a musings without mentioning Michael Jackson, yet again. The filmmakers had to screen the movie for Michael since he owned the rights to the Beatle's hit and the title song, "Can't Buy Me Love."

• One of the jocks in the movie was played by Gerardo Mejia, who went one to have a career as a musician, including the hit song "Rico Suave" in 1991. Gerardo taught Patrick Dempsey, a future star in his own right, the wavy dance moves that he performs in the film.

• Patrick Dempsey is an avid car collector and used the money he made from this film to purchase his first collectible - the 1963 Porsche 356 convertible.

• On a somber note, Dempsey's love interest in the movie, Amanda Peterson, suffered a traumatic experience on the set of this movie, which her parents shared after her death in 2015, that possibly led to her addition to drugs. She died at the young age of 43.

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

Don't Fall For The Mirage. It's been a tough year for investors that trusted the soft data instead of the hard data. Surveys that have proven mostly trustworthy for

years failed to confirm the actual data that provided a very different picture of the economy this year. The Hard Data has showed a stable economic picture, while the soft data warned of impending doom. U.S. GDP grew at +3.8% in the 2nd quarter, is projected to come in at +3.9% in the 3rd quarter, and according to the Fed, looks to be higher than 2% in the 4th quarter.

At one point in May, the survey data collected by the University of Michigan showed that consumers expected year-over-year inflation to reach +6.6%. That

information was being skewed by one particular segment of the survey group who held the expectation that inflation would go beyond +11%. In fact, the Consumer Price Index has just now reached +3% in 2025. The forecast for September CPI (delayed due to the government shutdown), was +0.4%, but the number came in at +0.3%. The year-over-year expectation was for +3.1%, but came in at +3.0%. If investors trusted the soft data in the survey, they probably missed out on double-digit equity returns so far this year. Relying on the hard data and the Fed's own projections proved more trustworthy so far this year.

By the same token, similar segments of consumers caused the University of Michigan's Consumer Sentiment survey to be distorted this year. While the consumer sentiment measure has been largely lower in 2025, Retail Sales and Redbook Sales have continued to show a strong consumer. Actual spending has remained above average, with little-to-no resemblance to recessionary periods of low or negative spending. When Ronald Miller fooled the "cool kids" in the movie, they should have paid more attention to who he really was instead of the concocted story that he and Cindy sold them. Investors would be wise to remember that lesson.

Don't Sit In The Visitor's Section. Early in the film, Ronald opines to his friend that he just wants to participate in normal senior activities, like going to the football games. His friend reminds him that they do go to the games, to which Ronald

says, "We sit in the visiting section Kenneth...at our own school." Investors don't have to sit in the visiting section, they just need to trust the hard data. Earnings surprises so far for the 3rd quarter are coming in at higher levels not seen in 4 years. To date, there has never been an earnings-led "bubble." Higher earnings mean that consumers are spending, which the means GDP will continue to

expand. That doesn't mean we should stop paying attention to potential cracks in the system. The talk this week has been private credit and the role of the big banks in lending to companies that are struggling or going into bankruptcy. So far, the majority of the damage has been in the regional bank space. However, several large banks - JPM, Bank of America, and Wells Fargo, have lent money to private debt firms in the billions. So far, we're not seeing credit show any signs of major concern. The "credit" element of the Chicago Fed's National Financial Conditions Index - including more than 30 financial indicators - is below zero at -0.08. In previous recessions, this subindex rose above 0.2 and even hit that mark during the Regional Bank Crisis in 2023.

Sentiment has also been part of the conversation this week, but so far, the bullish sentiment is still in tact. When discretionary stocks are compared to defensive stocks or staples, it provides a picture of how investors are positioning their money. As defensive stocks out-perform discretionary stocks, it tends to be a signal of weakness in the markets and perhaps the economy. Currently, discretionary stocks are out-pacing staples which means the bullish case is still strong. If we were to see the opposite, with staples out-pacing discretionary stocks, then we would have reason for concern.

The Ronald Miller cafeteria scene...

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