Secrets and Clues

Investors are looking for clues on where the market is headed next. Due to the government shutdown, some data may not be seen for a while, if ever. How can

investors unlock the secrets of the market? The inspiration for this week's musings is the 2004 movie, "National Treasure". Here’s some trivia about the movie:

• This movie was released just before Thanksgiving in 2004 and did well at the box office. The budget for the film is estimated at $100 million, while the film earned more than $347 million worldwide. It spawned a sequel in 2007, "Book of Secrets," and there is a rumored 3 movie in pre-production, but the script is yet unfinished.

• The movie suggests something is written on the back of the Declaration of Independence. In fact, at the bottom of the document on the back the words "Original Declaration of Independence dated 4th July 1776" is written upside down. It's likely that notation was written on the outside of the document as it was rolled up for storage.

• According to director Jon Turteltaub, the initial rough cut of the movie was around 4 hours long.

• The scene showing the Ian Howe's group planning their burglary of the Declaration, an external shot of Washington, D.C. shows the building in which they are meeting - the Watergate Hotel.

• Many of the scenes involving Independence Hall were actually filmed at Knotts Berry Farm in California, about 10 minutes from Disneyland. Filmmakers used the full-sized replica of Independence Hall because they weren't allowed to film in the original building in Philadelphia.

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

Treasure Hunters? The S&P 500 Index is trending flat for the week after suffering losses of more than 1.6% on Thursday. Concerns over AI valuations, the labor market,

and the December rate cut caused investors to take some profits. Fed futures show only a 46% probability of a December rate cut - something that was a 95% certainty just one month ago. In fact, three different Fed governors have come out this week and said that they are more concerned about inflation, while Chairman Powell has stated he is more concerned about the labor market.

Meanwhile, with a lack of information from Federal agencies concerning the health of

the labor market, fresh concerns have arisen. While Goldman Sachs and J.P. Morgan have estimated Initial Jobless Claims since the last actual report from the Bureau of Labor Statistics, there is no official data. The estimated numbers show a relatively stable situation, but recent layoffs announced from major corporate players - namely, Verizon (-15,000), Intel (-24,000), UPS (-48,000), and Microsoft (-15,000) - has caused some doubt as to how stable the labor market is given the lack of official numbers.

Meanwhile, in the realm of AI, more firms are seeking to fund AI projects and investments by accessing private credit. Prior to 2025, most major technology players

in the AI space were funding projects through cash flows and or equity (cash on hand). Now, more 90% of AI fund is being accomplished through debt instead of equity. In fact, most private equity firms have migrated into the world of private credit. As we mentioned a couple of weeks ago, private credit is very difficult to analyze and examine because the rating companies are not obligated to share their due diligence. One of those companies - Egan Jones - has now come under the scrutiny of the SEC for questionable ratings practices. This could lead to further concerns about AI projects and future earnings potential. The immediate trajectory for the market is a bit murky. When Ben Gates tries to evade the FBI by jumping into the Hudson River, lead Agent Sadusky askes, "Agent Dawes, do you have a visual?" To which Agent Dawes replies, "Sir, it's the Hudson. Nothing is visible."

Sometimes The Answers Are Right In Front Of Us. Investors want to have all the easy answers when it comes to allocating to markets. Well, sometimes that's the case,

if we're willing to look at the long term. When markets experience large down days, like we had yesterday, investors act like that's not supposed to happen. However, it's very common and happens a lot - we just forget when things are easy. On average, the S&P 500 Index has 29 large down days per year. Thursday's decline marked the 26th large down day of the year, so we're sitting right about average. We would do well to remember that downside price volatility is the price of admission for investors.

Corporations are still buying back their own stocks at a pace of $6-7 billion per day. It's very possible that today's market action - S&P 500 down about 0.3% to now up 0.3% - is the result of corporate investors stepping into the market. If that pace keeps up until year-end, it would keep any dips in equities relatively shallow.

Until we see some real shocks to the financial system, investors should stick to their long-term goals and investment strategy. While the concern over private credit issuance is valid, the Credit Subindex of the Chicago Fed's National Financial Conditions Index continues to be very stable. In fact, when it's this stable, the S&P 500 Index has managed to return high double-digit returns. Given the extended valuations, particularly among tech names, this is the perfect time to evaluate portfolios and take some risk off the table for those who have a more moderate overall risk tolerance.

The treasure is found...

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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.