When Valuations Levitate and Confidence Tanks

By the Curmudgeon with Victor Sperandeo

Macro-Economic Week in Review:

The Consumer Sentiment index from the University of Michigan decreased from 53.6 to 50.3. More importantly, the Current Conditions Index dropped from 58.6 to 52.3 – its lowest level on record. That implies that consumers feel worse about their current finances and buying plans than they have at any point since 1951. This includes the depths of the Great Financial Crisis in 2007-2009. See Consumer Sentiment Crashes section below.

Consumers' year-ahead inflation expectations from the University of Michigan inched up to 4.7% in November, well above the Federal Reserve's 2% target, suggesting ongoing anxiety about future prices.

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI) declined slightly from 49.1% to 48.7%, but write-in responses painted a far gloomier picture as businesses continue to grapple with major economic uncertainties.

The ISM Services PMI rose from 50.0% to 52.4% as the service sector remains in expansion (>50%). However, the Prices Paid Index increased to 70.0%, indicating that inflationary pressures continue to be a rising concern. A change in sentiment towards higher consumer prices will be a major disruption for the cuts priced into the Feds Funds futures forecasts.

The prolonged U.S. government shutdown, now at 40 days, has halted the release of key official economic data from agencies like the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA).

On Sunday, top Trump administration officials warned that U.S. air travel would slow to a “trickle” and US economic growth could turn negative if the country’s federal government shutdown continues for much longer. Treasury secretary Scott Bessent warned the economic impact would only get “worse and worse” as the closure disrupts air travel and cuts the flow of much-needed food stamps for low-income Americans. The closure could trigger shortages of goods and snarl supply chains as U.S. airlines continued to cancel flights because of understaffing of air traffic controllers and towers, Bessent said. 

Consumer Sentiment Crashes:

Consumer spending accounts for approximately 70% of U.S. GDP, and with consumers continuing to feel worse about their current conditions (see chart below), spending could slow significantly heading into the holiday season. Plunges in this indicator in the past have usually been a precursor or accompaniment to a Recession – making today’s overvalued stock market all the more precarious.

Technical Stock Market Update:

The leading NASDAQ Composite finished the week down approximately 3%, its worst weekly drop since the week ending April 4^th. The decline occurred amid a volatile week marked by a government shutdown, negative consumer sentiment data, and fears over a huge AI tech stock bubble.

It’s important to note that the NASDAQ Composite A/D line peaked this past July (see chart below), while the actual index continued to set one new all-time high after another till its recent top at 23,958.47 on October 29, 2025. It closed on Friday at 23,004.54.

Chart courtesy of Market In Out.

In addition to the deteriorating NASDAQ A/D line, the Chartist notes that “the number of NYSE stocks trading above their 50-day moving averages has dropped sharply—from around 80% in July to just 38% on Thursday—highlighting how participation in the rally has narrowed.”

Speculators have never been more greedy as Bears disappear:

Goldman Sachs Mike Zaccardi wrote on November 7^th::

As of the week ending November 6, 2025, the percentage of bearish advisors in the Investors Intelligence Advisors Survey was 13.5%, the lowest reading in nearly seven years. This number indicates that "bears have nearly disappeared"

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Victor’s Comments:

The U.S. economy continues to demonstrate a "K-shaped" pattern which is highly stratified and decidedly uneven. According to Morgan Stanley, "a “K-shaped” economy is a circumstance in which different consumer segments and industries grow at drastically different rates, creating a divergence like the letter “K.” In this instance, higher-income earners are seeing their wealth grow through investments, while lower-income individuals are struggling."

Image Credit: Image: Nicolas Gavrilenko

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In my view, the top 10% of U.S. households are currently doing very well, supported by financial asset appreciation and the relentless rise of home prices. The bottom 60%, however, are effectively in survival mode, struggling with rising living costs and debt burdens. Meanwhile, the middle 30%—those between the 60th and 90th percentiles—are maintaining stability but not achieving upward mobility.

This economic divide is reflected in the credit data. Auto loan delinquencies have reached their highest level since 2009, while credit card debt and delinquency rates continue to rise. The housing market is essentially locked up -- high mortgage rates have made affordability nearly unattainable, trapping existing homeowners and sidelining potential buyers. Transaction volumes remain historically depressed, with both sides of the market effectively frozen.

Despite this backdrop, the Federal Reserve appears reluctant to cut rates further, and the reasons seem increasingly political. Leading macro analysts, including Darius Dale of 42 Macro and Danielle DiMartino Booth of Quill Intelligence, have been among the most vocal critics of Fed Chair Jerome Powell’s monetary policy—arguing that the Fed’s current stance reflects political considerations rather than purely economic judgment.  They believe the Fed is behind the curve and should continue to cut the Fed Funds rate.

The Treasury yield curve is sending a mixed message. On Friday, the 10-year yield closed at 4.11%, compared with 3.98% on October 29, 2025—the day the Fed reduced the funds rate by 25 bps to a range of 3.75%–4.00%. The fact that the 10-year now trades above the upper end of the Fed funds target is highly unusual, suggesting market participants are skeptical of the Fed’s forward guidance. The 2-year T-note yield, typically more sensitive to monetary policy, rose to 3.69% from 3.47% over the same time period.

The steepening yield curve, coupled with Powell’s public statement warning markets not to expect another rate cut in December, effectively reversed the easing impulse the Fed hoped to deliver by its recent rate cuts. There was no new data justifying Powell's comment—which only reinforces the perception that the Fed’s messaging has become inconsistent, if not self-defeating. In my view, this is less about inflation management and more about political signaling.

At the same time, equity markets are behaving as if they exist in a separate economic universe. Valuations are at or near all-time highs, even as the underlying economy slows and credit stress builds. The Fed could address some of this speculative excess through macro-prudential tools like raising margin requirements to 100%, discouraging corporate stock buybacks, and ending the payment of interest on reserves—policies that would push capital back into productive lending rather than market speculation.

Finally, the labor market—long touted as the economy’s bright spot—is showing visible strain. Recent data show layoffs at their highest levels in decades, contradicting the narrative of a robust employment environment.

U.S.-based employers announced 153,074 job cuts in October - up 175% from the 55,597 cuts announced in October 2024. It’s also up 183% from the 54,064 job cuts announced one month prior, according to a report released Thursday from global outplacement and executive coaching firm Challenger, Gray & Christmas.

In California, layoffs have hit 158,700 workers through October of this year, the second-largest employment cuts nationwide. Challenger expects this year to be the nation’s worst for this layoff yardstick since the Great Recession era, minus 2020’s pandemic-scarred economy.

Beneath the surface, job quality and income growth are weakening markedly. Meanwhile, the Truflation year-over-year (YoY) inflation rate is 2.62%, while the BLS last reported the CPI YoYis 3.00% as of September 2025.

Victor's Conclusions:

In summary, we are watching a bifurcated economy and a Fed caught between politics and monetary policy discipline. The non-U.S. government economic data suggests growing stress among consumers and borrowers, while ultra high financial asset prices and tight credit spreads remain disconnected from reality.

Unless the Fed regains focus on fundamentals rather than optics, the next policy misstep could accelerate the divergence already shaping this "K-shaped" economy.

End Quote:

"If a nation expects to be ignorant and free, it expects what never was and never will be," from a letter by Thomas Jefferson to Charles Yancey on January 6, 1816.

Thomas Jefferson (a U.S. founding father, 3^rd U.S. president and primary author of the U.S. Declaration of Independence) argues that a government's officials have a tendency to "command at will the liberty and property of their constituents," which is why "there is no safe deposit for these but with the people themselves; nor can they be safe with them without information".

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Wishing you good health, peace of mind, success and good luck. Till next time……

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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