Two things can be true at the same time.
We can have record highs in the indexes — driven by a historic concentration of market power — while the real economy strains under debt, bankruptcies, and policy whiplash.
Going back to the 1980s, there have been cyclical manias in a select few stocks that can move the large indexes. The few carry the weight of many. And that’s in addition to the wild speculation a bull market encourages in small caps, new tech. (Source: Charlie Bilello)
Nvidia and Microsoft now account for over 15% of the S&P 500, the largest share for any two companies in the index’s history.
That’s not diversification. It’s a balancing act on the shoulders of two giants.
The trouble with a mania is that it tricks you into thinking you’re richer than you are.
You glance at your 401(k) statement and see big numbers, but those gains rest on a very narrow base. If retail investors get spooked and pull out of the Magnificent Seven, the broader market has very little underneath it.
The S&P 500 is already trading at historic P/E levels, but the price benefits are flowing almost entirely into a handful of ticker symbols.
We’ve seen this before. The wealth effect looks good on paper — until the market tests the load-bearing beams.
Mail Call — Donna’s Dilemma
Grey Swan member Donna Crowley writes: “I came to Grey Swan based on Addison’s concern for the stability of the stock market. We received numerous safe stocks to ride through the difficult time. I pivoted my portfolio to include those stocks. But the imminent collapse did not happen — at least not yet — and I am carrying these stocks. They are not included in the model portfolio of Grey Swan. So my question is, what is your advice?”
Donna, we can’t know the future. What we can do — and do every day — is study the trends, scan for the weak points, and try to see, however darkly, what could shake investor confidence.
Three data points from today give us another reason to be wary of historic highs on the indexes:
Retail investors now account for 21% of all options activity — an all-time high, and 5 points above the meme stock frenzy of 2021. (Source: JPMorgan)
U.S. companies have already announced $983.6 billion worth of stock buybacks this year — the busiest start since record-keeping began in 1982. (source: Birini Associates)
Seventy-one large U.S. companies went bankrupt in July — the highest monthly total since 2020. And on track to be the highest since the financial crisis in ‘08. (Source: S&P Global Market Intelligence.)
Each of these is a fault line. Together, they’re a map of where the pressure could break first. Again, with strong earnings in the few stocks at the top of the S&P 500, it’s hard to say with any certainty when or where these trends will come to a head.
For the record, while the stocks in our special reports are not in the Grey Swan model portfolio, they do represent companies that have significant upside potential – even at a time when the overall market is overvalued.
We believe that these strategic plays will help grow your wealth – allowing you to better survive a stock market correction.
But it’s not just long-side research, either. Our special reports also include stocks to avoid, including one we call The MAGA Blacklist, which lists 50 companies with slow growth, high debt and vulnerability to AI innovation—a recipe for disaster in a recession.
Tariff Truce… Take III
Yesterday’s 90-day extension on the U.S.–China tariff truce might seem like routine diplomacy. But rewind to April 6 — just after Trump announced his “Liberation Day” tariffs — and you get a clearer sense of how this administration plays the game.
That Sunday, Treasury Secretary Scott Bessent boarded Air Force One with the president, heading back to Washington from Mar-a-Lago. Markets were reeling — the biggest two-day selloff since the pandemic — after Trump waved placards in the Rose Garden with import duties as high as 49%.
Billionaire Bill Ackman warned of an “economic nuclear winter,” Jamie Dimon cautioned about a recession, and Larry Summers predicted job losses in the millions.
Bessent pitched an immediate pullback to calm investors. Trump wasn’t interested. “Let’s let it run a couple more days,” he told Bessent. “Do not say we’re willing to negotiate.”
It wasn’t until hours before the tariffs were set to bite that Trump announced the 90-day pause and a temporary 10% rate for most countries.
Stocks roared back, and the TACO trade — “Trump Always Chickens Out” — got another data point. Bessent insists it’s wrong. “The market did not force him,” he says. “He has a higher risk tolerance than I do.”
Now, with another extension granted yesterday, Trump keeps his leverage over Beijing while leaving the door open to scale back — or escalate — at will. But China isn’t letting it slide, urging government-linked firms to avoid Nvidia’s H20 chips and bristling at U.S. export controls. Trump hinted he could allow a stripped-down version of Nvidia’s Blackwell chip for China, but nothing’s certain.
Occupation of the District of Columbia
Trump declared a state of emergency in Washington, D.C., and ordered the Metropolitan Police Department placed under the control of Attorney General Pam Bondi, with 800 National Guard troops deployed. His stated goal: clear homeless encampments and “take our capital back.”
Mayor Muriel Bowser called it a “so-called emergency,” noting violent crime has been falling since 2023. Still, as with tariffs, Trump’s willingness to use blunt force is reshaping precedent in real time.
Fed Free For All
The search for Jerome Powell’s replacement now includes Vice Chairs Michelle Bowman and Philip Jefferson, plus Dallas Fed President Lorie Logan.
Meanwhile, Trump put Heritage Foundation economist EJ Antoni in charge of the Bureau of Labor Statistics after firing the previous head.
The shake-up is more than personnel drama — it’s the makings of a “shadow Fed” aligned with Trump’s push for lower rates, regardless of who holds the chair.
Traders, gamblers and the bond markets are betting on a rate cut next month, with today’s CPI data being “cool enough” to justify a quarter-point cut come the September meeting.
Indeed, July’s inflation data is showing the bite of Trump’s tariff regime. Headline CPI held steady at 2.7% year-over-year, with a modest 0.2% rise from June. But strip out the noisy food and energy components, and the “core” gauge logged its fastest annual increase in five months.
That’s the tell—businesses aren’t eating those higher import costs. They’re passing them straight through to customers, spreading price pressures across a wider swath of goods and services.
The uptick isn’t dramatic enough to keep the Fed from cutting rates in September, but it’s a reminder that tariffs don’t just hit the cargo docks. They end up in your grocery cart, your utility bill, and your next trip to the mechanic.
And plenty enough ammunition to get social media Fed watchers all a-lather about a Powell replacement – sooner than the end of the chairman’s term.
A Greener Gamble
If you’re not interested in our special research reports on how to deal with an impending correction of the major indexes, may we offer an alternative choice?
Trump confirmed he’s considering reclassifying marijuana from Schedule 1 to Schedule 3 —a change that could supercharge the nearly $80 billion cannabis industry by easing tax burdens and opening access to banking.
The president appeared ambivalent, saying, “I’ve heard some pretty good things, but… some pretty bad things.”
Politics aside, donations from major cannabis firms to Trump’s PAC have reportedly surged.
Pot stocks may not repeat their massive runs in prior years, but if they get the same kind of favorable regulatory environment that crypto is getting, traders may flock there. As they say – where there’s smoke, there’s fire. And Trump may light a match under this industry.
In the meantime, here’s the conundrum investors face today:
Bankruptcies: up. Delinquencies: up. Debt: at record highs.
Yet the indexes hover near all-time peaks because a few tech names carry all the weight. This is the nature of a mania — it conceals weakness until it can’t.
If the retail herd turns, the air pocket beneath could be wider than anyone expects.
~Addison
P.S.: This Friday’s Sneak Peek Grey Swan Live! lands by pure coincidence on the 54th anniversary of the day when Nixon closed the “gold window” in 1971, ending the Bretton Woods system.
Everyone born after that date has only ever lived under a fiat monetary system – ruled by governments and central bankers, not by the hard value of physical gold. It’s so ingrained that any change may be unthinkable.
But thinking about the unthinkable is something we enjoy. Because things do change – and often. And an unsustainable system like our fiat currency system is ripe for a big change soon.
Your thoughts? Please send them here: addison@greyswanfraternity.com
