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Financial creativity is on full display this year: alternatives, private credit, private REITs, crypto, stablecoins. But it is hard to understand these products, and part of the reason they are concerning is that many of them are new and have not been tested under duress.
At some point, markets will go down. They'll go down far and long, and it will feel depressing. Companies will stop naming themselves "Bullish Corporation" and going public.1 But a market-capitalization-weighted index fund reflects the economy, and we have a lot of confidence that over time, in the United States, 340 million of us working hard will figure things out.
But in a more esoteric investment that you don't understand? Or perhaps a single stock that you didn't analyze correctly? Confidence dissipates rapidly. In periods of economic decline or uncertainty, if you don't truly understand what is driving the mechanics of the investment, you'll start to question your own decision-making as the investor. Instead of confidence, panic will creep in. Instead of thinking "This is kind of terrible but we'll get through it" you start to think "I have to change something or I'm going into the abyss."
My wife is in medicine and there is an active debate in our household about whether there are more quack medical or financial ideas floating around out there. She made the point the other day that "research exists so that people don't think their own experiences are scientific reality." I thought this was great and secretly wished I had come up with it! You can get into a real epistemological hole on this one when you start questioning your reality, but keep in mind that your experience and insights are just a sampling point in a set, just a dot on a curve. The very democratic index counts them all.
ETFs are proliferating. There are lots and lots of them, and it's important to know that an ETF *is not* necessarily an index fund. Initially most ETFs tracked indexes.
The financial industry realized that the public liked the term ETF, in part because the goodwill from indexing bled into ETFs, and the vehicle itself is good in many ways, like tax efficiency. So of course a lot of meetings got held and I am sure a lot of consultants got hired to mess up a good thing. "Let's package one stock, like Nvidia, in a triple-leveraged ETF" says Connor at the end of the table, sipping a colorful Alani energy drink in part to show his sensitive side while pushing this daring bro trade. And Maria is like "It's been 17 years since the global financial crisis, and I got through that ok when I was in 8th grade, and so I think these derivatives aren't so bad after all, so let's pack them into an ETF and I promise I'll come up with a nice-sounding name for it. I might use the word 'Freedom' in it, just letting you all know ahead of time.'"
4,300 ETFs later, Connor and Maria have their promotions, and everyone else is confused and buying things that are complicated and hard to understand.
Remember: you want to invest in indexes, and you might do so via a low-fee ETF or via a mutual fund.~ Dan Cunningham
Notes
1. Though I do tip my hat to them on this one. Also Bearish Corporation as a name would have been even dumber.
2. Connor and Maria are hypothetical.
On any given Friday, it's not a great idea to label Isaac Newton a failure. I mean, the guy invented calculus.1
But even Isaac couldn't predict the markets, and he got swept up in irrational exuberance and lost a fortune in the South Sea Bubble.2 If you didn't like calculus in high school or college, this might make you somehow feel better. But I want you to remember this the next time someone opines to you on the level of the market: the guy who invented calculus had no insight into the great bubble of his day. Markets cannot be predicted.
But you have to know something, right? We can't all be Socrates walking around saying "All I know is that I know nothing." This Socratic Paradox is fun when you're a sophomore in college but no way to plan for retirement.
The market is close to its all-time valuation high, going back 230 years.3 We know this. We don't know whether it is worth this amount or not, as that requires a perfect prediction of the future business state of the United States and the world. With billions of "votes" per day, the markets have settled on the idea that the future looks bright. And the aggressive rise in the market could continue for some time. It could continue for a long time.
But we don't know, and optimism can fade to pessimism quickly. It would certainly be historically normal for the market to go flat or down for the next three to five *years*. Note that I didn't say "minutes" in this era of immediacy, I said "years." This is something you should think about now, as it almost certainly will happen. We just don't know when.
If you are reading this and thinking "this is not helping me, you just said two different things," you are correct. The point is that market predictions are worthless.
So what to do? We turn to what is controllable.
This is a critical thing to know about investing: whatever your risk allocation in your portfolio is, it is independent of time. In a well-structured portfolio, the risk you are willing to take now is the same risk you should be willing to take in a future time period, regardless of time, and regardless of what is happening around you.
If you are comfortable with, say, 70% of your assets in stocks now, and stocks decline 30%, you should still feel the same level of comfort with 70% of your assets in stocks after the decline. The frenzied activity of the business world, the markets, and the political world should not affect the asset allocation reasoning.
Life events, age, working status, and your capital level may change the risk profile of the portfolio (and we prefer to do this gradually, in a premeditated way). But the level of the market, and the events of the world, should not affect portfolio construction. If they do, you'll start to make decisions in hindsight, much like Isaac Newton.
Dan Cunningham
1. German mathematician Gottfried Leibniz was working on calculus at the same time as Newton, and arguably deserves more credit for the form used today.
2. Newton was rich before the bubble, and had been a cautious investor his entire life. But he lost a good chunk of his fortune, around $20 million today, in the collapse. He still died wealthy due to his prior success. Extended history.
3. Market valuation source: Burton Malkiel, NYT, 8/15/25.
I know, I know. You're heading to the beach this weekend and you want pictures, not words. You can't see all those words on a screen in the bright sunlight, and anyway it's summer.
Before I dive into a visual festival of charts, I want you to keep in mind the risk of fitting the story to the data you are looking at. It is very easy these days, in finance (or politics) to believe something, and then just find some data that matches that belief.
In his 2012 annual letter, Buffett wrote about this problem:
I ask the managers of our subsidiaries to unendingly focus on moat-widening opportunities, and they find many that make economic sense. But sometimes our managers misfire. The usual cause of failure is that they start with the answer they want and then work backwards to find a supporting rationale. Of course, the process is subconscious; that is what makes it so dangerous.
Let's get the negative out of the way. People are in a terrible mood, with consumer confidence hitting it's lowest level in 35 years (including the Global Financial Crisis) across income groups both below and above $100k:
This is spending momentum, from VISA. Below 100 on the chart means spending momentum is below its long-term average rate.
But the spending isn't always paid for. Here is a chart of debt types, more than 90 days delinquent. Note the surge in credit card debt not being paid, as well as student loans:
Onto rates. We have a "positive butterfly twist" yield curve. (Throw that term out at tonight's lobster bake on the beach.) The green line is as of June 30th. The dip in the three-five-year yield shows that investors expect rate cuts in the relatively near future. They are buying in the three to five year range to lock in rates, without exposing themselves fully to the duration risk further out the curve.
Inflation is not back to the Fed's 2% target yet, adding some uncertainty to the rate cut debate:
In the S&P 500, concentration is the highest it has been in 35 years. Note that the market is not necessarily wrong. The "Magnificent 7" tech firms have done a magnificent job creating high-growth monopolies for themselves that are difficult for competitors to attack, and the market reflects this. Profits are not quite as dominant as index share, primarily due to: 1. Spending on AI infrastructure is suppressing profits in the Magnificent 7 and, 2. The price-earnings ratio of the Magnificent 7 as a group is higher than that of the S&P 500. (For more reading on this, here is a 2023 newsletter I wrote.)
Ok, last chart. Here are the potential operating earnings of the S&P 500 for 2025 (y-axis) and the potential price-earnings trailing multiple (x-axis). Currently analysts expect 2025 earnings in the $260 to $270 range, and the current trailing multiple is about 26. Today the S&P trades at $6,307. You can play some visual checkers on this chart to see how a change in either the earnings or the multiple will affect the price of the S&P 500.
Ok that was a lot to absorb! Have a nice, hot weekend!
Dan Cunningham
Graph Sources:
1. Consumer Sentiment: Apollo Mid-Year Outlook 2025.
2. VISA Momentum: Visa via FRED.
3. Credit cards delinquent: Apollo Mid-Year Outlook 2025.
4. Treasury Yield: U.S. Treasury
5. Inflation: Sifma U.s. Economic Survey Mid-Year 2025.
6. Concentration: Apollo.com June 2025
7. S&P Operating Earnings and Multiple: S&P Global
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