Dancing on a ledge - MMM v6-31

From Euphoria to Uncertainty: Market Risks Return to the Spotlight

Stocks kicked off last week at record highs, fueled by optimism that the four key risks SEM outlined in our latest quarterly update—Trade War, Economic Slowdown, Debt & Deficit, and Geopolitical Conflict—were finally fading from the headlines.

That optimism didn’t last long.

Despite a wave of strong earnings from the biggest names in tech, all four risks came roaring back into the conversation—reminding investors just how quickly the narrative can shift. By Friday, the market’s tone had changed noticeably, with volatility ticking up and investor sentiment starting to sour.

Let’s start with the risk that has recently had the most direct and immediate impact on the markets:

⚔️ Trade War Tensions Are Heating Up Again

Trade sentiment had shifted. With fresh trade agreements in place with Japan and the EU, the market had begun pricing in a resolution with China. It looked like the most serious chapter of the trade war was behind us—until the talks collapsed early last week without a deal. That set the stage for disappointment, as new escalations reversed optimistic expectations in a hurry.

What’s New: Tariff Escalation by the U.S.

These "new" reciprocal tariffs apply to nearly 70 countries and are part of President Trump’s aggressive timeline—the biggest impact is China, which faces a 30% baseline tariff (including layered charges) with a deal deadline of August 12 (Source: Reuters)

Why this matters:

• Tariff uncertainty creates business uncertainty —no deal with China, revised deadlines, and then steep new levies—not subtle escalation.
• Global cost pressure may spike—Yale’s Budget Lab estimates U.S. import taxes are headed toward the highest levels since 1934, with tariff rates pushing average effective levels to 18–20% (Source:  AP News). Goldman Sachs estimated last week this will push the effective level from 15% to 17%, creating more upward pressure (Source: GS)
• Consumer and inflation risk is rising—economists warn these hikes could add roughly 1.8% to consumer price inflation this year, pressuring margins, earnings, and consumer demand. (Source: LPL Financial)
• It's hitting the economy (see next point)

📉 Cracks in the Foundation: From Survey Doubts to Real Slowdown

For months we’ve been highlighting the divergence between "soft" economic data (like business and consumer surveys) and "hard" economic data (such as jobs, spending, and production). Until recently, the soft data suggested growing concern while the hard data held strong.

That’s beginning to change.

Friday’s jobs report added to a growing pile of evidence that the economic slowdown is no longer just a concern—it’s beginning to show up in the numbers. Slower job growth, downward revisions, and a tick up in the unemployment rate all point to rising pressure on the labor market. This supports what SEM's economic model has been saying since early June.

Here's the latest look at our Dashboard where once again most indicators are hinting at a big slowdown in the growth rate of the economy.

On the surface, the economy is not "bad". The problem is it is running below the long-term average of 3.1% and has stalled the last 2 quarters at the 2% annual level. I use this chart to look at GDP growth as it paints a better picture. The orange bars are the "official" headline numbers, which essentially take the last 3 months and multiplies that rate by 12. The better measurement is to compare the current economic output to where we were a year ago, which is represented by the blue line. A year ago the economy was chugging along at an above average rate. It is now in what several Fed officials have described as "stall speed" as they understand if the economy does not start accelerating again

Our heatmap highlights the areas of concern.

The Jobs report stole all the headlines and has become the weakest area of our heatmap (which highlights changes in the trend). The issue wasn't so much the July number, which still was weak, but revisions to the May & June numbers which now show barely any new jobs.

The declining 12-month average is the lowest non-pandemic reading we've seen since the summer of 2007, which is obviously a concern. This of course inflamed the "fire Powell" rhetoric from the White House who has been a constant critic of the Fed Chair as they believe interest rates should be much lower. The problem, which Chair Powell mentioned several times during the Fed's press conference on Wednesday is their data and surveys suggest companies plan on passing along their tariff costs, which will put upward pressure on inflation later in the year. The "new" tariffs discussed at the top of the page will not help the Fed's decision.

The move to fire Powell was likely made easier late Friday evening when Adriana Kugler resigned her Fed Board position, effective next week. She was a Biden appointee whose term was set to expire in January 2026. This opens the door for President Trump to appoint his pick for Fed Chair, which then could be followed by firing Powell because the Fed Chair must be appointed from EXISTING Fed Board members.

The President was able to fire somebody on Friday as he accused the head of the Bureau of Labor Statistics (BLS) of "manipulating the numbers to make the economy look bad. He also (again) accused the BLS of manipulating the numbers to make President Biden look better. The irony is firing somebody over bad numbers and then appointing somebody else will only make everyone question the numbers going forward. (Source: CNBC)

I understand how easy is to point fingers when the numbers move around so much. Whether it's the jobs estimate, inflation, or GDP, we have to realize we have a $36 Trillion+ economy of over 100 million adults. This requires statistically based estimates that are put together by hundreds of economists (most are NOT political appointees). One person simply cannot change the report because they like or don't like the current president.

We've been posting the unemployment claims data nearly every week in the blog because unlike the monthly jobs numbers, this report involves far fewer estimates and surveys to generate the data. Essentially the Weekly Jobless Claims data is the total of unemployment claims data reported by all 50 states. This data has been highlighting a very fragile labor market. We've been averaging 200,000+ NEW claims for unemployment (meaning more than 200,000 Americans each week have lost their jobs). Worse, nearly 2 million Americans who have lost their jobs continue to struggle to find a new job. These numbers have been fluctuating, but they back-up the numbers we saw in Friday's Payroll Report.

SEM's economic model started in 1995. The numbers will ALWAYS be revised as the final tallies come in. Most employers do not have to report their official payroll count until the end of each quarter. In addition, new businesses start and close every day and those numbers often are not available until the following year. In the early days of our economic model I would enter by hand the new numbers for each indicator. As I did this I would look at the past 3 months to see if the data had been revised. If it had, I had to re-key all the data. In 2001, the FRED database went fully online, which made it a bit easier. If it changed, I had to download a new *.txt file, import it into Excel and replace all my old data. There was rarely a month where 1 or 2 of the indicators didn't need a new download. Thankfully FRED created an Excel plugin in the mid-2000s to make this much easier. My point being this isn't something new. The data has gotten significantly better, but it's still going to have revisions.

💼 Earnings Can’t Outrun the Headlines

Corporate earnings were most certainly not the cause for the selling – far from it. Some of the biggest companies in the S&P 500 reported strong results, particularly in the Technology and Communication Services sectors.

But as we’ve seen time and again, “good” earnings can get lost when macro risks resurface—and that’s exactly what happened. Trade war escalations, softening job data, and renewed inflation fears overshadowed otherwise solid quarterly numbers.

Here’s a summary of the 10 largest companies in the S&P 500 that reported last week and what we learned from each:

🧾 S&P 500 Earnings Highlights (Week of July 28–August 1)

Key Takeaways:

• Big Tech is still delivering: These companies are riding AI tailwinds, and so far, it’s translating to profits—not just hype.
• Strong earnings ≠ strong market: Even blockbuster numbers couldn’t stop stocks from falling once macro headlines turned negative.
• Sector growth is still narrow: Much of the earnings upside is concentrated in a few large firms. Broader participation is still lacking.\

I always say, "the market is a 'forward looking' mechanism. This means even if earnings last quarter were historically good, the market is looking at what the next few quarter's may be. Last week's sell-off is a reminder that short-term market moves are rarely about just one thing. Even as fundamentals look strong for key names, we offer a diversified set of models, which are currently mixed because macro risk—from tariffs to employment to inflation—can quickly overpower earnings momentum.

Our focus on risk management has most certainly "hurt" 2025 performance, but last week reminded us that the year is not over. The "liberation week" reversal was historic (fastest recovery from a 15% drop since the weeks following 9/11). It easily could have gone much different and if it had, nobody would have been asking "why did you sell that week?" The beauty of our models is they have no emotions. If they are wrong, they shake it off and look ahead for the NEXT trade. No second guessing, no believing they are right and riding the trade too long. This is what makes SEM different than most.

I have no idea what happens next. Based on the trends this year, the President could reverse course and soften his stance, pull-off another good deal with a key trading partner, and the market could rocket right back to all-time highs. Of course, that is not a given so we will continue what we've always done – watch the DATA and react accordingly. No guessing, no political opinions, no opinions.

Market Charts

The chart of the S&P since the Fed announced they were done raising interest rates in late 2023 tells the story. Stocks rose 54% in less than 2 years and have been on a steady march higher since the "liberation day pause". We were due for a sell-off regardless of the reason.

The bond market told us two things last week:

1.) The Fed is likely to cut rates in September — the market already dropped rates by about 25 basis points last week.

2.) Corporate bonds are not under stress (for now)

This of course can change, but for now this is nothing more than a simple market correction.

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): The high yield system has been invested since 4/23/25 after a short time out of the market following the sell signal on 4/3/25.

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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