The Shutdown Illusion: Markets Rally as Data Dies in Darkness

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The S&P 500 closed above 6,800 for the first time this week while the machinery that's supposed to tell us whether the economy is actually working quietly stopped collecting data. Markets rallied on hope for a US-China trade framework, but there's something unsettling about celebrating in the dark.

The government shutdown, now pushing four weeks, has created an unprecedented data blackout just as the Fed prepares to cut rates again:

• No September jobs report released

• No October labor data collection happening

• Inflation data releases potentially canceled

It's remarkable how comfortable markets have become making multi-trillion-dollar bets without knowing basic facts about hiring, unemployment, or price pressures.

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The Trade Deal That Isn't

Let's start with what actually moved markets this week. Treasury Secretary Scott Bessent announced a "substantial framework" with China that supposedly takes Trump's threatened 100% tariffs off the table. Stocks loved it. Apple hit $4 trillion in market cap. Risk-on euphoria swept through trading desks.

But read the actual details and you'll find something interesting: there are no details.

What we actually got:

• China agreed to buy soybeans again—helpful for Republican-voting farm states ahead of midterms

• America gets some vague promise about rare earth mineral access

• Bloomberg noted the framework leaves "deeper core conflicts unresolved"

• Manufacturing imbalances? Still there. Tech restrictions? Unchanged.

This isn't a trade deal—it's a photo op with purchase orders attached.

Markets have been trained to buy every "trade progress" headline since 2018. The pattern is consistent: tough talk, market selloff, framework announcement, relief rally, followed by more tough talk six months later. What's different this time is that investors are pricing in resolution without any mechanism to verify whether the underlying economy can support current valuations.

Flying Blind Into a Rate Cut

The Fed meets this week with markets pricing in a 95% chance of another 25 basis point cut. That decision will be made without September employment data and with zero visibility into October's labor market.

The last hard data we have:

• Just 22,000 jobs added in August

• Unemployment at 4.3%—the highest since 2021

• Federal employment down 97,000 since January due to government cuts

Chair Powell will stand at his podium Wednesday afternoon and explain the Fed's data-dependent approach while the data literally doesn't exist. The irony is thick. Chicago Fed estimates suggest labor markets have continued softening, but these are nowcasts built on partial information—essentially educated guesses dressed up with confidence intervals.

Rate cuts are usually bullish, but they're typically cut when the economy needs help. Markets are treating this cycle as "insurance cuts" that extend the expansion. That narrative works until it doesn't. The last time the Fed cut rates into a strong market with limited recession fears was 1998. That bought 18 months before the tech bubble imploded.

The $4 Trillion Question

Speaking of bubbles, Apple became the third company to cross $4 trillion in market cap this week, joining Nvidia and Microsoft in that rarefied air. The company is rallying on better iPhone 17 sales and hope that tariff pressures have eased.

But step back and consider what's required for this valuation to make sense:

• The three largest companies in America are now worth $12 trillion combined—roughly half of US GDP

• Nvidia's entire thesis rests on AI spending continuing at current rates indefinitely

• Microsoft's cloud growth needs to accelerate

• Apple needs the iPhone to remain immune to economic cycles

These aren't impossible outcomes, but they're priced as certainties.

The concentration is the real risk:

• When 30% of the S&P 500's value sits in seven stocks, "diversification" becomes a polite fiction

• The index isn't broad-based strength—it's a leveraged bet that mega-cap tech never disappoints

• Top 10 stocks now comprise nearly 40% of the S&P 500—surpassing even dot-com bubble levels

That worked brilliantly for the past 18 months. Just don't call it defensive positioning.

Strategy Spotlight: AlphaFactory Protective

When you're navigating record concentration and a data blackout, the traditional playbook doesn't cut it. This is exactly the environment where AlphaFactory Protective offers a disciplined alternative to buy-and-hold beta exposure.

The strategy holds a fixed basket of 10 high-market-cap stocks from NASDAQ/NYSE alongside GLD (Gold ETF), but here's where it gets interesting—it doesn't just buy and hold. Instead, it dynamically adjusts allocations based on realized volatility in SPY:

How it works:

• Low volatility environment: Full allocation to stocks selected via combined momentum and value scores

• Moderate volatility: Mix of stocks and gold

• High volatility: No equity allocation—full defensive positioning

The stock selection itself is quantitative—combining 12-month momentum scores with value metrics (negative PEG ratios) to avoid paying premium prices for stretched valuations. Each gets a z-score, and only stocks with positive combined scores receive allocation.

Right now, we're in a strange regime where implied volatility (VIX around 16) suggests complacency, but we're making Fed decisions without employment data and celebrating trade deals with no details. This disconnect between market calm and informational uncertainty is precisely when protective mechanisms earn their keep.

The strategy isn't trying to predict whether markets go up or down tomorrow—it's acknowledging that when concentration is extreme and visibility is zero, position sizing based on volatility makes more sense than pretending diversification exists. You're not making a macro call. You're letting market behavior dictate how much risk you're actually taking.

This approach offers something traditional 60/40 portfolios can't right now: automatic de-risking when realized volatility spikes, without requiring you to time the market or predict corrections. In an environment where the top three stocks are worth $12 trillion and no one knows the unemployment rate, having a systematic exit ramp isn't paranoia—it's prudence.

The Big Picture

We're in a strange moment:

• Markets are at record highs while the government that produces the data everyone claims to care about has been dark for weeks

• The Fed is cutting rates without recent employment figures

• A trade framework that resolves nothing is being celebrated as a breakthrough

• The biggest companies in history keep getting bigger on the assumption that nothing ever changes

None of this means markets crash tomorrow. Momentum can persist longer than fundamentals suggest it should—that's been true for decades. But the setup feels increasingly fragile. When you're driving blind and accelerating, the margin for error shrinks fast.

The data blackout ends eventually. Jobs reports will resume. We'll find out whether August's weakness was a blip or a trend. We'll see if consumers held up through the uncertainty or pulled back.

Until then, markets are pricing perfection based on information from two months ago and hope about China based on frameworks to be determined. That's not analysis—it's faith. And faith works great until everyone checks the evidence at once.

Stay skeptical out there. The best time to question assumptions is when everyone else has stopped asking questions.

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.