Rapids of Change - MMM v6-27

Watching for Shifting Currents

We’re still rolling along on our RV adventure—kicking off the week with white-water rafting on Clear Creek in the Rockies, holding meetings and working in the Denver area for three days, and capping it all off with a spirited Fourth of July on the Kansas River in Lawrence, where impromptu fireworks lit up the evening. Just as navigating rapids requires both preparation and an eye on shifting currents, I'm reminded that the "smooth ride" we are seeing in the markets can turn quickly. In fact, the longer everything is "easy", the more dangerous the rapids around the bend will be to those who are not prepared.

Here’s a quick look at SEM's latest economic model update, what we missed last week, followed by a preview of the week ahead.

SEM's Economic Model Update

While the market celebrated a "stronger than expected" June payrolls number, our data continues to warn that the economy is sliding its way to at best a below average year and at worst a recession. We aren't there yet, but the payrolls report was not a reason to buy stocks (in my opinion) based on what we see:

The headline number was still positive, but the 12 month moving average has flatlined and is running at a rate that is not strong enough to keep the unemployment rate from starting to tick up. (Economists believe we need to average around 225,000 'new' jobs to keep the labor market at equilibrium.)

Worse, the growth in weekly hours has slowed to a crawl. Again, not quite negative, but heading in the wrong direction.

This is consistent with what our monthly Initial Jobless Claims data point is saying – there is weakness beneath the surface in the labor market.

The weekly number improved a bit last week, coming off the 7 month high, but continuing claims remain at a 3 year high.

Even Consumer Spending slowed in the past month.

Overall, our economic heat map shows very few areas to be excited about.

As I said last week, not one single indicator is falling through the floor, but each one seems to be gradually sliding. This has left Wall Street optimistically believing the trends will reverse higher.

Our dashboard, which is data driven (not based on how we feel) shows an economy that is currently not in a place to sustain above average growth rates in corporate earnings.

This leaves our economic model in "bearish" mode.

What Happened Last Week

• Equity markets hit fresh record highs: Markets ground their way higher the first few days last week, but a "stronger than expected" jobs report led to nice gains during Thursday's half-day session.
• Treasury yields drifted higher: The 10-year yield rose last week to ~4.44% as investors weighed increased T-bill supply against persistent inflation concerns.
• Tech giants led the charge: Mega-caps like Nvidia—now edging toward a $4 trillion market cap—continued to outperform on strong earnings projections and FOMO among “market participants.”
• Mixed signals on inflation: Manufacturing prices rose slightly in June, while average hourly earnings growth slowed, keeping traders questioning the Fed's next move.

Week Ahead

It's a VERY light economic calendar this week. This will leave Washington as the primary driver of the news cycle (again):

• Big Beautiful Bill impact: The $3 Trillion+ deficit spending package (based on CBO estimates) is now law. Will this cause a spike in economic growth similar (or better) than the 2017 (temporary) growth surge? How will the Treasury market react?
• July 6-7 BRICS Summit: While not normally on the agenda, this summit has caught the eye of the President given one of the key agenda items: a BRICS payment system meant to eliminate the dollar in trade between the countries (Brazil, Russia, India, China, and South Africa are the primary members). They also are expected to craft a response to US tariff threats and ask the G7 countries to pay for climate change. This has led to President Trump warning that anybody participating in "BRICS" policies to immediately be assessed a 10% tariff. It also is the likely source of several inquires from our clients about "dumping Treasuries". We addressed this in the Bonus Content of our most recent newsletter.
• July 9 (or is it August 1) Deadline for reciprocal tariff "pause": This entire rally started when President Trump announced a 90 day pause in his reciprocal tariffs announced on "Liberation Day". That was supposed to end this week on July 9 (Wednesday), but late Sunday evening the Treasury Secretary said those tariffs would be in effect on August 1 without a "deal". President Trump said notice letters would be going out today and they "may" give the countries 3 more weeks to "negotiate". Last Thursday a "deal" was announced with Vietnam, but no details emerged. I would expect some big threats over the coming days/weeks along with some more announced "deals". I don't think anybody out there believes we will get to August 1 and see an immediate announcement that all of the tariffs are back in place or if he does that it won't be for just a few days, but it is something we should have on our radars.

Market Charts

Stocks closed the week at another all-time high. Unlike prior weeks, the market broadened significantly and the RSI Index confirmed the new highs (a positive sign on both accounts).

Despite the positive technicals, the rally off the April lows has been nearly straight-up. Some sort of correction is both necessary and should be expected.

When that happens is everyone's guess. My guess (based on experience and history) is some sort of outside event that none of us are forecasting right now will be the culprit. For me that means watching the bond market for signs of stress. As mentioned in the market recap, rates moved higher last week. The passage of the BBB on Friday will tell us at least short-term how much tolerance the bond market has for a continuation of the exponential increase in debt we've seen since the pandemic.

SEM Market Positioning

SEM deploys 3 distinct approaches – Tactical, Dynamic, and Strategic. These systems have been described as 'daily, monthly, quarterly' given how often they may make adjustments. Here is where they each stand.

Tactical (daily): On 4/3/2025 our tactical high yield model sold out of high yield bond into money market. The system re-entered on 4/24/2025.

Dynamic (monthly): The economic model went 'bearish' in June 2025 after being 'neutral' for 11 months. This means eliminating risky assets – sell the 20% dividend stocks in Dynamic Income and the 20% small cap stocks in Dynamic Aggressive Growth. The interest rate model is 'neutral' meaning low duration/money market investments for the bulk of the bonds.

Strategic (quarterly)*: One Trend System sold on 4/4/2025; Re-entered on 6/30/2025

The core rotation is adjusted quarterly. On August 17 it rotated out of mid-cap growth and into small cap value. It also sold some large cap value to buy some large cap blend and growth. The large cap purchases were in actively managed funds with more diversification than the S&P 500 (banking on the market broadening out beyond the top 5-10 stocks.) On January 8 it rotated completely out of small cap value and mid-cap growth to purchase another broad (more diversified) large cap blend fund along with a Dividend Growth fund.

The * in quarterly is for the trend models. These models are watched daily but they trade infrequently based on readings of where each believe we are in the cycle. The trend systems can be susceptible to "whipsaws" as we saw with the recent sell and buy signals at the end of October and November. The goal of the systems is to miss major downturns in the market. Risks are high when the market has been stampeding higher as it has for most of 2023. This means sometimes selling too soon. As we saw with the recent trade, the systems can quickly reverse if they are wrong.

Overall, this is how our various models stack up based on the last allocation change:

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