The Illusion of Recovery: Why This Week's Rally Sits on a Foundation of Sand

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The week's trading action delivered the kind of cognitive dissonance that defines late-cycle market psychology. Major indices hit fresh all-time highs on Monday, with the S&P 500 climbing above 6,735 and Apple surging nearly 4% to record levels, all while the federal government remained shuttered for its third consecutive week and critical economic data sat in bureaucratic purgatory. If you're wondering how markets can rally while the machinery of economic measurement grinds to a halt, congratulations—you're paying attention.

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The Data Blackout Nobody Wants to Discuss

Let's start with what should terrify anyone making investment decisions right now:

• The September CPI report, originally scheduled for October 15, was delayed until October 24 due to the government shutdown—but only because the Social Security Administration needed third-quarter inflation data to calculate cost-of-living adjustments before the November 1 statutory deadline.

• The Bureau of Labor Statistics brought back just enough staff to meet that single requirement. Everything else? Still dark.

• The collection of new price data for the October CPI report has been largely halted since the shutdown began October 1, which means the Federal Reserve will head into its October 28-29 policy meeting with September's backward-looking inflation snapshot and essentially nothing current.

Markets are pricing a 98.9% probability of a 25 basis point rate cut at that meeting, but they're flying blind on whether inflation is actually cooperating with that narrative.

Here's the uncomfortable truth: Fed Governor Stephen Miran wants a half-point cut and expects three quarter-point cuts totaling 75 basis points by year-end, while Governor Christopher Waller backs the more cautious 25-basis-point approach. The Fed is internally divided about how aggressively to ease, yet the market has already decided the path with near-certainty. When conviction exceeds information, someone usually gets hurt.

Regional Banks and the Cockroach Theory

While tech stocks partied on Monday, regional banks spent Thursday getting demolished:

• Zions Bancorporation disclosed a $50 million charge-off tied to "apparent misrepresentations and contractual defaults"

• Western Alliance sued a borrower for alleged fraud

• The regional banking ETF plunged over 6%, its worst day since April

The issue isn't two bad loans. The issue is what JPMorgan CEO Jamie Dimon articulated with characteristic bluntness: "When you see one cockroach, there are probably more."

The numbers tell the story:

• Regional banks hold approximately 44% of their loan portfolios in commercial real estate, compared to just 13% for larger banks

• Over $1 trillion in CRE loans are maturing by year-end

• Office loan delinquency rates are approaching 10.4%—levels last seen in 2008

The market spent Monday convincing itself this was contained, idiosyncratic risk. By Thursday it was pricing in systemic fragility.

The Shutdown Kabuki Continues

Analysts are increasingly using the word "November" when discussing when the shutdown might end, with some expressing concern that Thanksgiving travel could be at risk. Treasury Secretary Scott Bessent warned Wednesday that "we are starting to cut into muscle here" and estimated the shutdown may be costing the US economy up to $15 billion daily.

Yet markets seem content to ignore this entirely, focusing instead on strong corporate earnings and optimism about potential Fed rate cuts. Over 85% of S&P 500 companies reporting so far have beaten earnings expectations, which sounds impressive until you remember that analyst estimates are deliberately set low specifically so companies can beat them. It's a participation trophy system for billion-dollar corporations.

Strategy Spotlight: Recession Resistant

Given the treacherous cross-currents defining this market environment, this Recession Resistant strategy becomes particularly relevant for portfolios positioned defensively.

This approach focuses on companies that have historically demonstrated resilience during economic downturns—the defensive stocks that consumers can't stop buying even when times get tough:

• Consumer staples

• Healthcare

• Utilities

• Essential retail

The strategy's thesis is straightforward: when commercial real estate loans are souring, the Fed is cutting without clear data visibility, and government shutdowns drag into their fourth week, companies with predictable cash flows and essential products tend to outperform. It's not flashy. It won't make you rich overnight. But it's designed to protect capital when the market realizes it's been pricing perfection at precisely the wrong moment.

This is a rules-based, diversified approach to positioning portfolios for stability—not a guarantee of returns, but a disciplined framework for navigating uncertainty when the cracks in the foundation start showing.

The Big Picture: Expensive Optimism

Markets are priced for perfection at precisely the moment when visibility has vanished:

• A government shutdown entering week four with no resolution in sight

• A Fed preparing to cut rates without knowing what inflation did in October

• Regional banks sitting on commercial real estate exposure that's starting to crack

• Major indices at all-time highs

The disconnect should be obvious. Either markets are correct that all of these issues are transitory noise, or they're mispricing risk in spectacular fashion. Jamie Dimon noted Thursday that he'd "feel more comfortable if asset prices weren't very high and credit spreads weren't very low because that's a long way to fall"—and warned that "the market kind of thinks everything's going to be fine, and I'm not quite so sure of that."

When the shutdown eventually ends and data starts flowing again, we'll discover whether the September inflation print that gets released October 24 supports the Fed's dovish pivot or complicates it. We'll learn whether the October jobs report shows continued strength or the first cracks. And we'll find out how many more cockroaches emerge from regional bank balance sheets.

Until then, enjoy the rally. Just understand what you're buying at these prices: the most expensive faith-based investment thesis in recent memory, packaged as prudent optimism and sold at all-time highs.

Stay sharp out there,

— Analyzed Investing

Disclaimer: This newsletter is provided for informational and educational purposes only and does not constitute investment advice, financial advice, trading advice, or any other sort of advice. The content herein represents the opinions and analysis of the authors and should not be considered a recommendation to purchase or sell any security. Surmount and its affiliates are not registered investment advisors. All investments involve risk, including the possible loss of principal. Past performance does not guarantee future results. Before making any investment decisions, you should consult with your own professional advisors and consider your individual financial situation, investment objectives, and risk tolerance. The strategies mentioned are not suitable for all investors.