Wesley Chapel, FL
“The function of economic forecasting is to make astrology look respectable.”
I am hoping to keep this one short. Not because there isn’t anything to discuss, but because I am already late getting this out due to visiting family in Michigan for Independence Day, and I have a lot of catching up to do!
Port Huron, Michigan | July 4th, 2025 | Happy Birthday America!
I hope that you also had a great holiday spent with family and friends.
Market Update and Outlook
The extreme level of complacency that Jamie Dimon, CEO of JP Morgan Chase, discussed in the video clip I shared last month has continued. I don’t know if it is possible, but market participants may be even more complacent than they were then.
Mr. Dimon, speaking in Dublin, Ireland, on July 10, said that it is “totally impossible to read” what data shows about the economy and reiterated his assessment of the complacency present in the markets.
Have you ever heard the term “kayfabe”?
Kayfabe is a professional wrestling term. Not the professional wrestling you see at the Olympics – I am talking about WWE-type wrestling, which, despite being totally staged and fake, is still watched religiously as if it were real by grown men (and probably women) all over the country (and world). I am not knocking the business. In fact, the stock is publicly traded and has doubled in value over the past couple of years since its IPO. We actually own it in the Elevate Capital Momentum Micro Strategy.
The term kayfabe likely originated from carnival slang and may be a Pig Latin form of the word “fake.” It describes the portrayal of events, including match outcomes, character behaviors, rivalries, and storylines, as if they were real. The kayfabe extends to performers staying “in-character” even out of the ring to maintain the illusion.
What is most interesting to me is the audience participation aspect. Fans are expected to, and demonstrate that they do, entirely suspend disbelief. They engage with the programming as if it were totally real, even though they know that it certainly is not.
Well, what I see in the markets today is a version of the kayfabe that is economic in nature. Reality never seems to sink in totally. When reality does begin to make a breakthrough, such as in 2022 when the S&P 500 dropped 27% from peak to trough and Nvidia fell nearly 70%, or a few months ago when the S&P 500 dropped 21% from peak to trough and NVDA fell 43%, ultimately a new and totally made up story line develops that renews the audience’s complete and total suspension of disbelief, and the markets recover without ever fully acknowledging the economic realities.
Thanks to the legend, Paul Tudor Jones, for turning me on to this analogy. And sure, all analogies break down somewhere, and this one is no different; it is the best explanation that I’ve heard.
In the interview below, Paul Tudor Jones mentions the “economic kayfabe” at about the 7:30 mark. The whole interview is worth watching, as I have said before, when the legends speak, I stop and listen - even if I don’t always agree with 100% of what they say.
One factor that I think is still driving the market higher despite any and all forms of bad news is the “relentless bid” the markets get from passive investors. These investors blindly invest their money into the market every two weeks in the form of retirement plan contributions.
Many of these people, who are otherwise intelligent and rational, will tell you that they don’t own any stocks when asked. What they don’t seem to realize is that around 38% of bi-weekly contributions are landing in just 10 stocks! Not only are they heavily exposed to stocks, but they are highly concentrated in just a few giant names.
The financial services industry has trained them not to open their statements or ever look at their balances. The big lie embedded in passive investing is predicated on how the financial services industry makes money. If you are Vanguard, or Fidelity, or any of the big fund providers, you must create a storyline in which it always makes sense to both own and keep buying, no matter the economic reality. They spend untold amounts on “research” that “proves” it.
It’s really just a kayfabe!
There are at least three logical fallacies at work in passive or index investing.
The first is that owning an index locks you into always owning failing businesses in the name of diversification. I often call it de-worsification. Since the year 2000, 180 companies have been removed from the S&P 500 due to poor financial performance, leading to declining market capitalization. And, due to mergers. Some of these companies were household names, such as General Electric, Kodak, Lehman Brothers, Bear Stearns, and Enron.
How can you expect to ever generate above-average returns if your capital is always tied up in terrible businesses?
The second logical fallacy is that a bigger business, or higher market capitalization, is “better”, and a low market cap is “worse.” The reason 38% of passive investors’ money is going into just 10 stocks is simply because those stocks are the largest by market capitalization (or cap for short). This amounts to the most expensive stocks receiving the most capital, which makes absolutely no sense, and everyone with half a brain knows it. Can you say it with me? K-A-Y-F-A-B-E!
Market cap isn’t even the best way to judge the size of a business, so even if bigger were better, market cap would be the wrong way to measure it. Enterprise Value would be the better measurement, but that is a concept for another time.
So far, I have shown you that indexing is spreading your capital across dozens of failing companies and then heavily concentrating it in the most expensive companies… How does that sound?
And then there is the third logical fallacy that neither fundamental nor technical analysis can help investors accurately identify and invest in the best businesses at fair prices. This is probably the most sinister of the three logical fallacies, and it is complete and utter nonsense.
In 2018, Henrik Bessembinder published a study showing that most stocks underperform treasuries during their existence. Only a tiny percentage of stocks account for the entire net gain in the US stock market. Specifically, he found that just 4% (around 1,000 stocks) of the listed companies from 1926-2016 (26,000 companies) accounted for ALL the net wealth creation in the entire market. Inside that 4% was a subgroup that he called “power law winners.” This subgroup of 86 companies, approximately one-third of one percent (0.33%) of the original 26,000, was responsible for half of the total wealth creation. Meanwhile, 58% of the 26,000 failed to beat T-bills.
While I completely agree that everyone in the world may not be able to consistently identify the best businesses in the world, determine a fair price for them, and then buy them when they trade at or below that fair price – many people can and do. I know many of them personally, and many more indirectly. People like Warren Buffett, Stanley Druckenmiller, Ray Dalio, Joel Greenblatt, David Einhorn, and on and on and on, have demonstrated an ability to do this consistently for decades on end.
I don’t pretend to be worthy of being named in the same sentence as these guys. Still, I hope that by the time I am done, something similar will be said of me, ideally with less notoriety! So far, I am proud of our track record, and I am always looking for ways to improve.
None of this is to say that an index fund is never a reasonable investment vehicle. Sometimes, and for a wide range of reasons, a passive strategy can make sense, at least for a while. We offer passive strategies to our clients with smaller account balances due to share price limitations. We even use index funds as alternatives within our actively managed strategies, particularly when companies we like have moved above their fair values, or when we simply need some beta (market) exposure and can’t find any quality businesses trading at fair prices.
So, I am not opposed to using index funds when they are the best option. But the idea that they are always the best option is a kayfabe.
What’s my point? Well, nobody is getting paid to wax eloquent about market structure and economic kayfabe. If all of what I have written so far is true, and I think it is, or I wouldn’t have written it, it means that the market is fundamentally broken. But does that mean we should sell all our stocks and hide out in cash until things start to make sense again? No.
The point of all this is that despite the kayfabe world in which we live, and partly because of the relentless bid in the biggest stocks for all the wrong reasons, the market can continue to rise despite the reality of a fundamentally flawed economic backdrop, whether it be inflation, tariffs, employment, stock valuations, high interest rates, geopolitical upheavals, etc.
We can still identify the world’s best businesses, determine their fair values, and buy with both hands when opportunities present themselves. And in the meantime, we can own the best sectors through ETFs and use trailing stops to get us out when reality begins to make a comeback, as it always does at least temporarily. And when that happens, many of the great businesses we follow drop below their fair value range, allowing us to buy them with the cash we've raised by following stops.
Rinse. Repeat.
So, with that in mind, I will share some of our normal charts and such, with some brief comments. Even if some (or many) of them seem to be bearish, or good reasons to sell, just keep in mind the kayfabe suspension of disbelief and the relentless bid of passive investors that are underwriting the market’s grind higher. We’ll start with how the indexes we’ve been tracking performed last month, and year-to-date.
Gold is still leading for the year by a wide margin, with the other indexes all within a few percent of each other. It is worth noting that the Top 10 index was down less at the lows, and is up more for the year now, than the so-called Mag 7. The “relentless bid” continuing until the last baby boomer has their 65th birthday is our thesis for the maintaining exposure to the Top 10. That will happen in 2029 and at that point, the Top 10 will theoretically become their largest sources of capital.
Next up, lets look at the S&P 500 index valuation.
It doesn’t take a CFA Charterholder to see that we are approaching the most expensive valuations in history based on any of the three valuation measures. I will come back to this in another chart a bit later.
Next, take a look at the Buffett Indicator which compares GDP to the Wilshire 5000 index.
Yet another indicator saying that people are paying the highest prices ever for stocks.
Meanwhile, the US Dollar is crashing to its lowest levels in three years. When Trump was elected, the dollar initially rallied and looked as if it would breakout to new highs. It turned out to be a fakeout. A lower dollar actually makes things priced in dollars rise in price - all else equal. That includes things like stocks and gold.
I think one of the biggest valid concerns about the economy to day is that it seems like foreigners are moving away from US Dollars and our treasuries. I have discussed before, but this is a consequence of trying to eliminate trading deficits with tariffs. Our deficit is their surplus. What were they doing with their surplus? They were using US Dollars to buy our treasuries and fund our massive $37 trillion (and counting) debt.
The national debt recently passed $37 trillion. That works out to $108,187 per citizen and $323,052 per tax payer. How many people do you know with that kind of money to spare? And keep in mind, that $37 trillion doesn’t include any future expenses for Social Security, Medicare or Medicaid. If we included those future obligations, which any business preparing financial statements in accordance with US GAAP is legally required to do, our debt would be closer to $300 trillion. What could possibly go wrong?
Meanwhile, GDP which I discussed in a fair amount of detail last month, was revised lower on the third and final release, to -0.5%.
And inflation, as measured by both the CPI and the PCE have begun to reaccelerate, as expected.
Now lets look at continuing jobless claims. This is the number of people who are still receiving unemployment benefits after their initial claim. All of these people have been unemployed for at least 2 consecutive weeks. Most states limit unemployment benefits to 26 weeks.
That’s almost 2 million people who have been collecting unemployment for at least 2 weeks. If that were a stock chart, I’d be looking to buy the breakout… unfortunately, it is not a stock chart and not a great sign of a strong economy.
Below is that different version of the S&P 500 Forward P/E ratio that I mentioned I would come back to earlier. It has a little more history than the first one, and a little more data as it compares the P/E to CAPE, Dividend Yield, and Earning Yield (EY) spread vs. bonds. You should get a higher yield out of stocks to account for their increased risk over investment grade bonds - but right now, you don’t. Who cares?
The next chart is related to the one above. So, from the current forward P/E of 22, what should you expect about your forward returns?
Well, over the next year (looking at the chart on the left) its hard to say. The scatter plot is all over the place. At other times when the forward P/E was 22, the return on the S&P 500 one year later was more than 40%! But other times it was down around 30%. On average though it was about 2%.
The chart on the right shows you that from the same starting point, when the forward P/E was 22, five years later the returns were more consolidated or predictable, and again averaged about 2%.
The takeaway is that when paying 22x earnings for stocks, you should not expect much in the way of returns over the next five years. You can have a higher degree of certainty about the five-year forecast than the one-year forecast.
In the image above, I am mostly focusing on the chart on the right. It shows, as I mentioned earlier, that the top 10 stocks in the S&P 500 are getting 38% of every new dollar invested. This is an all-time high by A LOT! Not even when the top 10 traded at a P/E of over 40 (left chart) during the dotcom bubble did the top 10 stocks attract so much capital.
And finally, we’ll wrap up with a prettier chart than I had time to create on my own showing you where we are with the tariff rates compared to history. Hint: its not good… but nobody cares about this either!
On July 9, when the 90-day pause of reciprocal tariffs was set to expire, the deadline was largely extended to August 1. Shocker. President Pump, I mean Trump, did send some letters to various countries telling them that their tariff rate would be much higher than the 10% flat rate for everyone. Here are the announced rates so far:
20% on Philippines
25% on Brunei
25% on Moldova
30% on Algeria
30% on Iraq
30% on Libya
And then, out of nowhere, he went to 50% on Brazil, with which we have a trade surplus… the reason? Trump thinks Brazil is treating its former president unfairly.
And he also announced a 50% tariff on copper, across the board. All of these are “scheduled” to begin on August 1, so if we know anything about this president, it is that by the time August 1 comes around, much could have changed.
Until next time, I thank God for each of you, and I thank each of you for reading this commentary.
Clients, I encourage you to click here to access your personalized performance portal and see how your portfolio performed compared to the markets last month.
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors
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