Hey everyone, Hedgie here. The economic data keeps surprising to the upside with Q2 GDP revised to 3.8% and consumer spending holding firm. But I'm watching a market that's up 30% from April lows without even a 2% pullback. When good news can't push stocks higher, that tells me we're priced for perfection.

Let me walk you through what I'm seeing and why October might finally bring the volatility we've been missing.

Second quarter GDP came in at 3.8%, well above the 1.5-2% trend growth. Consumer spending drove the beat at 2.5% versus 1.7% expected. August personal spending surprised too, up 0.4% real after inflation. The Atlanta Fed's tracking Q3 at 3.9% growth.

But here's what concerns me. We're getting this growth while companies are still absorbing tariff costs through margin compression. Corporate profits rose just 0.2% in Q2, way below projections. When growth depends on companies eating costs rather than passing them through, that's unsustainable.

Real spending up 0.4% for two straight months looks resilient, but it's being funded by savings drawdowns and credit expansion. Personal income only rose 0.4%, matching spending, which means no rebuilding of buffers. The Bloomberg Economic Surprise Index shows momentum, but surprises work both ways.

Core PCE inflation stuck at 2.9% annually tells me we've found a floor well above the Fed's 2% target. With Trump announcing new October 1st tariffs (100% on pharma, 50% on cabinets, 30% on furniture, 25% on trucks), inflation pressure builds from here, not eases.

Weekly jobless claims fell to July lows, which bulls are celebrating. But I'm focused on the bigger picture. We're still averaging just 29,000 jobs monthly over three months versus 82,000 last year. Claims always bounce around weekly, the trend is what matters.

The October 3rd jobs report becomes critical, but we might not even get it if the government shuts down October 1st. Speaking of which...

Congress looks headed for shutdown with no continuing resolution in sight. History shows these are usually short-term disruptions, but timing matters. A shutdown right as new tariffs hit and the Fed's trying to decide on rates adds unnecessary uncertainty to an already extended market.

The S&P 500 up 30% from April without a 2% pullback isn't normal, it's euphoric. Forward P/E at 22.9x exceeds everything except the dotcom bubble and pandemic zero-rate period. When the best GDP print in two years can't lift stocks, that's distribution, not accumulation.

October's historically 20% more volatile than other months. Combine that with shutdown risk, tariff implementation, and stretched valuations, and we have a recipe for the first real correction in months.

Fed officials remain deeply divided. Miran wants aggressive cuts, Bowman supports gradual easing, while Goolsbee and Schmid warn about inflation risks. Markets price 40 basis points of cuts by year-end with high confidence. I think that's optimistic given 2.9% core inflation and new tariff rounds.

The October 30th FOMC meeting could disappoint markets expecting aggressive easing. If inflation ticks higher from tariffs while growth moderates from shutdown effects, the Fed might pause entirely.

Consumer discretionary faces headwinds from October 1st furniture and cabinet tariffs. Healthcare gets interesting with 100% pharma tariffs unless companies build US plants. That's not possible short-term, so either drug prices spike or shortages develop.

Financials benefit from higher-for-longer rates if the Fed pauses. Tech at extreme valuations remains vulnerable to any disappointment. I'd rotate toward defensive sectors and quality dividend payers.

I'm raising cash into strength. Not going all cash, just taking profits on extreme winners and rebalancing to target weights. Building a shopping list for the correction that math says is coming. October volatility plus shutdown plus tariffs equals opportunity for patient capital.

The economy's solid but markets price perfection. Good GDP can't lift stocks, inflation won't break below 2.9%, and the Fed's openly confused. That's not bearish, it's realistic about risk-reward at these levels.

Watch for these catalysts: October 1st shutdown probability, October 1st tariff implementation impacts, October 3rd jobs report (if released), October corporate earnings starting mid-month, and October 30th FOMC meeting.

The economic fundamentals support stocks longer-term, but 30% rallies without pullbacks don't last. When everyone's bullish and valuations are stretched, patience becomes the best strategy. I'd rather buy the dip than chase the top.

Stay sharp this week. October's reputation for volatility exists for a reason, and this year we're giving it plenty of ammunition.

Hedgie

Weekly Market Stats

For educational purposes only. I'm a hedgehog who studies markets, not a licensed financial advisor. Always do your own research and consult professionals for personal financial decisions

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