What We Believe?

What we believe has profound effect on how we act and, most notably, how we invest. The power of media can play on our beliefs and shift our investing focus, often times,

in the wrong direction. This week's inspiration for the musings is the 1979 hit song "What A Fool Believes" by The Doobie Brothers. Here's some trivia about the song:

• This song falls squarely in the resurrected "Yacht Rock" genre (a subject we've written about previously). The song was released in 1978, but didn't reach #1 until the following April in 1979. The song was one of a few to reach #1 in 1979 that were non-disco hits. It sold more than 1 million copies and received the Grammys for "Song of the Year" and "Record of the Year."

• While performed by The Doobie Brothers, Michael McDonald co-wrote this song with Kenny Loggins. The two had wanted to collaborate for some time. Loggins went to visit McDonald at his home and heard him playing a tune on the piano and Loggins suggested they work on it together. Loggins did record a version of the song by himself, but it was never released as a single.

• The concept for the song is a scenario where two people meet in a restaurant who were in a relationship in the past. To the man, it was one of the best things in his life. To the woman, it was fun, but ultimately, time to move on. In other words, love makes a man a fool and even a wise one can't reason it away.

• This song was the band's 2nd hit to reach #1 on the Billboard charts - their first being "Black Water." However, the band took on a different sound after lead singer Tom Johnston passed away. The band went from gritty rock to "yacht rock."

"He came from somewhere back in her long ago

The sentimental fool don't see

Trying hard to recreate what had yet to be created

Once in her life, she musters a smile for his nostalgic tale

Never coming near what he wanted to say

Only to realize it never really was"

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

Sentimentality Backfires. The media loves to push the emotional buttons of their audience, which in turn, helps fuel greater viewership of their content. We often don't

see the hidden bias or agendas that are behind many of the headlines that are published. The month of May is a great example of sentimentality being manipulated all for naught. There were 21 primary headlines that moved markets during May. If we analyze those headlines, at least 40% were tariff-related and another 40% were related to Treasuries or interest rates. Despite all of the nashing of teeth over this headline or that headline, the S&P 500 Index gained more than 6% during the month. Instead of being allowed to be swayed one way or another by the headlines, the patient investor would have participated in one of the strongest months in S&P 500 history. This May was the strongest May since 1990 and the best one-month return in more than 2 years. We'll address tariffs later in this post, but when looking at Treasury yields,

there really isn't as much correlation as one might think there is between equities and bonds. If we analyze the different yield levels of Treasuries, the corresponding return of equities over time is in the double-digit range, with the exception of 7-8% Treasury yields. The 10-year Treasury is yielding roughly 4.4%, which would correlate to approximately 11-15% return for the S&P 500 Index, if history holds true. In other words, relying on data is a far more consistent approach to investing versus relying on the media to provide the right investment approach.

Nostalgic Tariff Tales. There have been countless articles written on how tariffs are inflationary, or recessionary, or insert your disaster of choice. The reality is, not much

has really changed two-months after "Liberation Day." Last week, we highlighted the improvement in shipping from China to the U.S. One-week removed, the improvement has gained even more steam. Containers shipped from China to the U.S. exploded higher last week by almost 40% to reach the level last seen in January of this year, before the trade war with China began. For all the fear mongering that tariffs would cause major shipping disruptions and derail markets, that doesn't appear to be the case.

Meanwhile, customs and tariff revenue have hit an all-time high. April and May saw revenues from tariffs exceed any month for the previous 20 years. While the national debt is significantly higher, money coming in the door is better than money going out the door (so to speak). If there is no sustained disruption in shipping and tariff revenue continues to come in at a steady pace, that would likely prove a win-win for the current administration.

No Need To Recreate Economic Data.  While there are plenty of headlines to suggest the economy is ready to roll over, the hard evidence just isn't manifesting itself yet.

The National Financial Conditions Index published by the Chicago Federal Reserve measures whether or not financial conditions in the U.S. are loose (favorable) or tight (unfavorable). Of the 105 contributors to the index, 94% are looser than average. Two of the sub-indexes of that index are Credit and Risk. The sub-index for Credit shows a negative value, meaning there are no warning signals flashing in credit markets that would resemble pre-recessionary periods of the past. At the same time, the sub-index for Risk is at very low levels, also not resembling recessionary warning levels.

In fact, while we can debate the federal debt levels, corporate debt continues to be quite favorable. When we look at S&P 500 companies and their level of Net Debt to Market Cap, the current level is no where near other recessions, such as 1990, 2001, or 2008. A sign of previous bubbles is when corporations become bloated with debt and the bubble bursts. Based on some of the labor data that was released this week, corporations look to be in hiring mode. Job Openings increased last month, while Job Cuts decreased. The Unemployment Rate held steady in May and jobs were added in the economy. That means consumers should continue to have money in their pockets for spending - and you know what that means? Growth.

Somewhere Back In 1979. Just as The Doobie Brothers were reaching #1 in 1979, nuclear energy was falling off the cliff. The nuclear facility at 3-Mile Island in

Pennsylvania experienced a non-nuclear failure. Water pumps did not send water into the steam generators to remove heat from the nuclear core. As a result, the first nuclear renaissance began to die. In 2025, we could be witnessing the beginning of a 2nd nuclear renaissance. The demand of AI will absolutely cause the current electrical grid to fail. The most conservative estimates show that data centers in the U.S. will require 606 terawatts of electricity by 2030 (the equivalent of the entire electricity consumption of the country of Sweden). In order to achieve that, AI companies - most notably Google, Meta, Microsoft, & Apple - are allocating billions to nuclear development. That includes the re-opening of 3-Mile Island. More nuclear facilities will need to be built and there will

be a new demand for the latest technology regarding more efficient fission processes. This will require labor in the areas of construction, science, and utilities. This would likely benefit the economy with more energy production and increased labor. Even without the development of AI, the current state of the electrical grid would need to be addressed. As compared to the 1950s, when much of the U.S. electrical grid expanded, we have appliances and devices that require more energy. In addition, there were only 46 million households in 1950 with electrical demands versus 130 million households today. There's likely more technologies and discoveries that could emerge from this 2nd nuclear renaissance that we are unaware of as we sit here today. There's reason for excitement, especially investing opportunities, as opposed to reading gloomy headlines that are uninspiring.

What a fool believes...

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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.