Market Pulse

September is usually Wall Street’s villain, robbing the stock market of momentum and investment gains.  But not this year, as the S&P 500 and the Nasdaq closed out their best September in 15 years.  The S&P 500 and the Nasdaq rose 3.5% and 5.6% respectively, and the Dow gained 1.9% for the month. The end of September also brought the end of the third quarter where the S&P 500 was up almost 8%, while the Nasdaq notched a more than 11% quarterly gain, and the blue-chip Dow was up more than 5%, its fifth straight quarterly advance.

A new Fed rate cutting cycle, continued signs of growth in AI, earnings momentum, and a good-enough economy have been the primary catalysts supporting stocks. Not even a government shutdown that is entering its third week seems to be able to sidetrack investors and the current bull market… and looking ahead, the 4^th quarter is historically the best quarter of the year. The S&P 500 posts a positive return 80% of the time with an average gain of 4.2% dating back to 1950 (Source: Carson Group). Furthermore, history shows that the S&P 500’s atypical gains in August and September should not dull or dilute from the prospects of the so-called Santa Claus rally that tends to boost stocks at year end.

On the surface, the deck appears biased towards upward momentum, but our sense is that we are walking on more of a tight-rope than a wide, clear-path ahead. The longer the government shutdown goes on, the bigger impact it has on the economy and an already fragile consumer.  Additionally, a Supreme Court ruling on President Trump’s tariffs is a key headwind that could affect markets in the 4th quarter. Arguments begin on Nov. 5 and will test the legality of many tariffs under the International Emergency Economic Powers Act.

A bigger concern for us is the market’s dependence and overwhelming concentration around artificial intelligence.  Right now, the largest 10 companies in the S&P 500 make up 40.6% of the index. This is the highest level of concentration for the S&P 500 since 1972 (source: Ned Davis Research). It is also estimated that overall tech spending was responsible for around two-thirds of the economy’s 1.6% advance over the first half of the year.

As a result some people are questioning the investment levels that companies are shelling out for AI. Some back-of-the-envelope calculations from McKinsey and Morgan Stanley suggest that the money being spent on semiconductor chips and hardware alone would need to generate a net cash flow of over $500 billion in 2028 to meet the cost of capital on just the equipment investment. Eventually, requiring consumers and businesses to pay about $3.1 trillion for AI related services.  Adding fuel to the fire, a recent MIT study found that 95% of current AI investments have earned no meaningful return.  While that sounds awful, we are in the very early stages and AI is making an enormous difference in the productivity of workers.  It just hasn’t led to a big boost to profits yet.   

Obviously, if markets can continue this high-wire act, the reward is high. But if it doesn’t come to fruition, there is a long way to fall. Therefore, we continue to feel it’s important to prepare for both outcomes.  A process that includes lowering some of those high-flying allocations, shortening the distance between the walk with fixed income maturities of 5 years or less, and building income safety nets with companies that have a strong, time-tested history of both paying dividends and increasing them year-over-year. 

Practical Application: Fear-Storming

You’re probably familiar with the concept of brainstorming where you build a list of possibilities and options for a given situation. Fear-storming is similar, but is designed to identify fears, doubts, or obstacles that might block progress.

It’s not meant to be negative, but rather preventive… to challenge your thinking and quell fears and concerns that may be more internal than external.

On the surface, you may be thinking, “Bob, I don’t have to write this down since I’ve gone over it all in my head during my last few sleepless nights.” But there is much more to the process than just writing down what is looming over or around you.  In fact, there are three steps that are important to include. 

Step1: Start by listing a worry, fear, or concern below.

Step 2: Use the scale of 1-5 to realistically access the likelihood it actually happening. 

Step 3: Switch to brainstorm mode and write down 1 or 2 things that you can do to reduce
or help alleviate your fear, worry, or concern.

There are a myriad of things you can use fear-storming to help you with.  Some common examples might include issues around employment, downsizing, retiring, aging parent, adult child, and even things more broader topics like money, health, and politics.

#1  ____________________________________________      1      2      3     4      5

                                                                                          (Not likely)           (Highly Likely)

What can help right now?  _________________________________________________

_______________________________________________________________________

#2   ____________________________________________      1      2      3     4      5

                                                                                           (Not likely)           (Highly Likely)

What can help right now?  _________________________________________________

_______________________________________________________________________

#3   ____________________________________________      1      2      3     4      5

                                                                                           (Not likely)           (Highly Likely)

What can help right now?  _________________________________________________

_______________________________________________________________________

The goal isn’t to minimize or trivialize your fears or concerns, but rather to get them out of your head and on a piece of paper. There, you can be more concrete and realistic about possible future outcomes… and in the process, create the space and time you need to begin to address and overcome them instead of allowing them to slow you down or hold you back.