Welcome, Sandbox friends.
Today’s Daily discusses:
stay vigilant to risk
Let’s dig in.
Blake
Markets in review
EQUITIES: Nasdaq 100 +1.19% | Russell 2000 +1.04% | S&P 500 +0.58% | Dow 0.00%
FIXED INCOME: Barclays Agg Bond +0.01% | High Yield -0.15% | 2yr UST 3.586% | 10yr UST 4.129%
COMMODITIES: Brent Crude +1.04% to $66.13/barrel. Gold +1.48% to $4,063.8/oz.
BITCOIN: +1.16% to $123,493
US DOLLAR INDEX: +0.28% to 98.853
CBOE TOTAL PUT/CALL RATIO: 0.91
VIX: -5.45% to 16.30
Quote of the day
“Man is free at the moment he wishes to be.”
- Voltaire
Stay vigilant to risk
Domestic equity market indexes continue to march higher, reflecting a bullish price trend that’s been in place since the spring.
What’s more, the price trends of many global stock proxies are also bullishly configured and sit near 12-month highs or all-time highs.
Many investors continue to “fight the tape” despite the overwhelming technical evidence that suggest the risk is higher from here – even if confronted with a near-term air pocket.
And yet, we must remind ourselves that investing is always a probabilities game using the weight of the evidence, as nothing is ever guaranteed.
Although it’s more likely than not that investors play catch-up during Q4 which should further drive momentum and prices higher into year-end, it’s always a fruitful exercise to consider the various risks that could undermine the bull case.
A few to consider:
Waning momentum: While there is no real overhead resistance for the vast majority of the major averages (as they are making all-time new highs), over-extended stock prices rising “too much, too fast” can lead to a euphoric melt up, a ramp higher in margin, offsides positioning, or even profit-taking.
Index concentration risk: The top ten stocks in the S&P 500 account for approximately ~40% of the index’s total market capitalization. A shift in the narrative for two or three of these widely-held names could disproportionately affect broader market performance and thus sentiment.
Labor market weakness: The Fed has put everyone on notice: the balance of risks, specifically the labor market, has shifted. A weakening labor market may lead to reduced consumer and corporate spending, reflecting a slowdown in the economy. Is the Fed behind the curve? Hard to tell right now with the government shutdown shutting down the Bureau of Labor Statistics (BLS), the very agency responsible for reporting jobs data.
A Fed “misstep”: To be fair, this risk is always on the table. The Federal Reserve is in a difficult spot with a bull steepening yield curve and its commitment to “data dependency.” They must delicately balance short-term rates falling faster than long-term rates to maintain economic growth, stabilize unemployment, and keep inflation under control.
Earnings growth slowdown (ie valuations are too rich): Many corporations remain uncertain about the effects that tariffs will have on their forward earnings, and concerns have increased about potential overvaluations as stock prices rise. Lower top and bottom-line growth could pressure stock prices, erode investor confidence, and potentially truncate the bull market that began in late 2022.
Tariff Headwinds: The second quarter earnings season was one of the best since the pandemic reopening, delivering 12%. Can corporate America ace their report again? The jury remains out on tariffs and the impact they will have on the global economy. However, the resiliency of the American consumer suggests investors are less concerned about tariffs than they had been.
President Trump: Last, but certainly not least, is the man holding the nuclear football who has proven impulsive at many points throughout his five years in office. What’s on his mind that we don’t know?
As always, listen to the beat of the market and watch the data, specifically changes to the existing trend – these always trump any narrative spun across the media, or the thoughts and concerns toiling in your head.
That’s all for today.
Blake
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Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.
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