The federal government shut down last week so we didn’t get the monthly employment report last Friday and I think that may be the best news investors have gotten all year. I expect a lot of government generated economic reports to be missed during the shutdown, which I think could drag on a lot longer than previous versions. With the political blame pretty evenly spread around so far, neither side seems to have much incentive to compromise. And so I think it will drag on until that changes and the high frequency economic reports we get every week will be a tad less frequent. I don’t expect the market to care much.

Despite the lack of an employment report from the government last week, we did get information on the labor market. The ADP employment report showed a loss of 32k jobs in the month of September, but the report was somewhat confusing due to annual revisions. Sound familiar? It was about as useful as the monthly official government report, which is to say, not much. Investors reacted briefly by buying some bonds and selling some stocks but by the end of the week no one was talking about it. We’d all be better off if investors paid as much attention to the official report as they do the private market version.

We got plenty of other information about the economy last week. The Dallas Fed – remember the Fed is not funded by the federal government – released their manufacturing survey showing a decline to -8.7 from an already negative -1.8. The National Association of Realtors reported on pending home sales which were up 4% in August and nearly that much year-over-year while S&P released their Case-Shiller home price index, whose 20 city index fell 1.3% from June to July. Prices are up just 1.8% over the last year. Redbook released its weekly same store sales report which showed a rise of 5.9% over the last year. The Conference Board’s Consumer Confidence Index fell 3.6 points to 94.2 in September while the Present Situation and Expectations indexes also fell. The latter has been below the recession threshold of 80 since February. Respondents appraisal of current job availability fell for the ninth straight month. Despite all that negativity, nearly half of survey participants expect stock prices to rise over the next year.

There were also manufacturing PMIs from S&P (52 vs 53 last month) and ISM (49.1 vs 48.7), services PMIs from both (53.9 and 50, S&P and ISM respectively), total vehicle sales from Ward’s Intelligence (16.4 million up from 16.1 million last month), job cuts from Challenger, Gray and Christmas and the oil rig count from Baker Hughes, which shows the number of operating rigs is still well below the long-term average. The Challenger report offered some interesting details:

US-based employers announced 54,064 job cuts in September 2025, the least in three months, compared to 85,979 in August and down 25.8% yoy. Services cut the most jobs (6,290), followed by the energy sector (5,807), and technology (5,639). Considering Q3, planned layoffs by US employers totaled 202,118, the highest Q3 total since 2020. So far this year, companies have announced 946,426 job cuts, the highest YTD since 2020 and the fifth highest in the 36 years. The government sector has announced the most cuts this year (299,755), of which 289,363 were Federal workers impacted by DOGE. Technology companies followed with 107,878 job cuts.

There have been a lot of layoff announcements this year, with government leading the way, something that has probably never been true before this year. I find it hard to argue that’s a bad thing; government spending as a percent of GDP is running 20% above the long-term average. Government could probably use a little trimming even if the DOGE method leaves a lot to be desired. 

We have more sources for information today than we ever have, with much of the data from the private sector more timely and more useful. Alternative sources of economic information (thanks to Torsten Slok and his team at Apollo):

  • Restaurant bookings – OpenTable
  • Retail/Wholesale sales – Redbook, Chicago Fed CARTS, Port of Los Angeles, Port of Long Beach, American Association of Railroads
  • Hotel bookings, occupancy – STR Haver Analytics
  • Labor market – Indeed job postings, American Staffing Association, Challenger, Conference Board
  • Wages – Atlanta Fed Wage Tracker
  • Future inflation – ISM prices paid, Regional Fed surveys prices paid
  • Inflation – University of Michigan Consumer survey, Conference Board, NFIB, Zillow, Case-Shiller, NY Fed survey of consumers
  • Housing – National Association of Homebuilders, Redfin, National Association of Realtors, Mortgage Bankers Association
  • Capital spending – NFIB, Federal Reserve Banks of New York, Dallas and Philadelphia – Future capital expenditures diffusion index
  • Economic growth – Atlanta GDPNow, St. Louis Fed Weekly Economic Index, Federal Reserve (bank loans and leases data)

If you’re worried that we’re “flying blind” because of the shutdown (as several headlines read last week), I have good news for you. We know more about the economy today, even without the government reports, than we ever have and most of the information is free. That doesn’t mean it is all useful for investors, by the way. Except at major turning points in the economy, which have come fairly infrequently over the last 50 years, most investors would be better off in the dark. Those major economic turning points are hard to pinpoint and even if you get them right, there is no guarantee you’ll be able to make a timely and accurate market call. Market timing is hard even with good data.

So, where is the economy heading into the final quarter of the year? Even with all this data and years of experience, I can’t tell you. All I can really do is tell you how things are right now, which isn’t as easy as it sounds. There is a lot of contradiction in markets and in the data but overall the economy appears to be growing slightly below trend this year (once you get rid of distortions from tariff front running) and expectations for growth have fallen somewhat. Treasury rates at the 10-year and 2-year maturities are down this year by 69 and 86 basis points respectively, a reflection of those declining expectations. On the other hand, a steeper yield curve is generally associated with higher growth over the next year so maybe the market is already looking past the slowdown. Interestingly, inflation expectations, as measured by the TIPS market, are unchanged this year so the drop in long-term nominal yields is all about a reduction in real growth potential. More importantly, interest rates are still in a downtrend – growth expectations continue to fall. 

A lot of the stock market gains this year – some would say all – have been rooted in high – very high – expectations for future growth from Artificial Intelligence, a term general enough to be applied to just about any industry. Mere mention of AI by a company is all it takes to get stock punters interested. Alibaba, the Chinese everything company, is up over 50% in the last couple of months on a series of AI announcements, the latest being that they intend to raise their AI spending over the next three years beyond the $50 billion they had already planned. Alibaba may well be a great investment but merely spending more on AI doesn’t make that more likely. The mania for everything AI has pushed the S&P 500 into an extreme where the top 10 stocks – 9 of which have a direct and significant connection to AI – now represent almost 40% of the index. The S&P 500 growth index is even more skewed, with 55% in the top 10 holdings (9 of which are the same as the core index). 

The index isn’t cheap, trading at 22 times the 2026 operating earnings estimate and 28 times trailing 12 month earnings. The current P/E is higher than all but 22% of the quarterly readings since 1988 with the only higher P/Es being the last 6 quarters, late 2020 to late 2021 and the late 90s/early ’00s dot com boom. Not that valuations are all that much help with market timing. Stocks were much cheaper than today from September 2002 to March 2009; valuations gave you no warning at all for the GFC. Valuations really only tell you about risk. If valuations are above the long-term average (about 19.5 since 1980), a correction to average or lower could involve a more significant drawdown than if your starting point is below average. But like most things in investing, that isn’t carved in stone. The forward P/E on the S&P 500 at the beginning of 1973 was only a tad over 14 but that didn’t stop the index from falling 43% to a P/E of 8 by the time that bear market ended in late ’74. Market valuation is a useful tool but it isn’t sufficient by itself to make a market call.

Still, today’s market does seem uniquely risky when an index investor is effectively investing 40% of their equity allocation in 10 stocks, 9 of whom have been inflated by AI hype. It may be performing well but the risks taken to achieve that return matter in my opinion. This year, a better risk-adjusted return could have been had by merely adding an international component to your portfolio. International indexes started the year cheaper and more diversified than the S&P – they still are – and they have outperformed to boot. A portfolio of 50% EAFE and 50% S&P 500 has returned 21.6% this year versus 15.3% for the S&P 500. 

Other diversifying assets have provided positive results too, starting with gold*, up 47% YTD. Platinum*, palladium*, silver and copper have also all outperformed the S&P this year as have Latin America (+38%), Europe (36.5%), Hong Kong (32%), Japan (22%), International real estate (21%), Emerging markets (31%), and Chinese stocks (43%), to name a few. Obviously, all of these things are not, by themselves, less risky than the S&P 500 but a portfolio of dissimilar assets can reduce risk even if the components are more volatile individually. 

There is plenty for investors to worry about right now, as there always is, but I wouldn’t put loss of government economic data near the top of that list. I also don’t worry much about the valuation of the S&P 500 (and some other global indexes), mostly because I don’t own it but also because it isn’t very useful when looking at an index. What I do worry about is the concentration of those indexes and what might happen if AI turns out not to be the productivity game changer everyone seems to believe it is. AI may well be a productivity miracle but if this technology revolution goes like all the ones before it, it will take longer to get to the promised land than all the AI evangelists claim today. Harry Markowitz said that diversification is the only free lunch in investing. Now might be a great time to indulge.

*Alhambra and/or its clients and employees own gold (IAU, GLD, PHYS), platinum (PPLT), palladium (PALL, SPPP) and Japan (EWJ, HJPNX).