THE MACRO

It’s the final stretch of the year, and things are starting to shift. The markets are standing strong on the surface, but under the hood, there are signs of pressure from AI overspending to rising credit risk, geopolitical tension, and a government shutdown. AND on that note, it seems like the 8 democrats are siding with republicans to get short-term funding needed to reopen the government (see below).

It’s not panic time, but it’s definitely interesting times ahead.  A good time to get clear, stay grounded, and think long.

Here’s how I’m playing it….

The Overall Picture

The U.S. economy is still moving forward; it’s not booming, but also not broken. Growth is hanging in there. Jobs are still being created. Consumers are still spending, but more carefully now, meaning it’s not a spending freeze, it’s just a shift from “who cares what it cost” to “is it really worth it?” And businesses haven’t slammed the brakes.

We’re starting to see some wear & tear. It’s not as strong as earlier this year. There’s more noise in the data, and we’re seeing early signs the economy is slowing a bit. Job growth still seems positive, based on private payroll data, but likely cooling down. Consumers are spending more carefully, and credit card delinquencies continue to creep up. Businesses sound more cautious, too.

The government shutdown adds to that uncertainty. Without full data coming in, it’s harder to know exactly how things are trending. But what we do know:

· Inflation isn’t spiking
· The Fed is finally easing up on rates
· The job market is still healthy, just not what it was

I wouldn’t say this is a red flag moment, but it’s time to be selective. There’s still opportunity out there, and when you’re buying great businesses for the long-term, there always will be.  You just have to do more looking under the hood and sticking to your rules (strategy).

Are Markets Pulling Back?

Market mood

The markets have enjoyed great runs, but we’re starting to see some weakness, although we are still within about 5% or less from highs (S&P 500 and Nasdaq). It’s starting to feel like much of the good news is already “priced in” and that the margin for error is low. 

AI CapEx is huge

Big tech firms are throwing massive money into AI, especially into chips, data centers, and cloud infrastructure. But the earnings aren’t keeping up, and people are starting to ask questions.

Here’s what’s happening:

· CapEx explosion: Microsoft, Meta, Alphabet, and Amazon are projected to spend over $200 billion combined on AI and infrastructure in 2025.

· Meta alone is expected to spend $30+ billion in AI infrastructure build-out.

· Earnings lag: Most companies aren’t showing AI related revenue/profits that justify the cost, not yet at least.

· Valuations are stretched:  AI exposed stocks are priced for aggressive future growth, with little room for error.

· Some analysts are calling this a huge bubble where capital flows and investor hype are ahead of revenue & profits.

Why this is different from 2008…

Back then, banks poured money into the mortgage-backed securities market, assuming it would pay off…until it didn’t.

Today, big tech is pouring money into AI infrastructure, assuming it will be the next big profit engine…but we don’t know when or if that payoff hits.

The 2008 bubble was built on credit and hidden risk. The AI run-up is based more on speculative equity investment and massive capital spending.  It’s still risky, but in a different way.

Keep reading, there’s a way to play it…

Bottom line:
The spending is real. The opportunity is huge. But the risk is that companies are racing to outbuild each other in a space that hasn’t fully figured out how to turn scale into profits, and that’s why there’s bubble talk.

My take

Investors are asking the right question: how much of this AI “hype” is real?

Spending is through the roof, but earnings haven’t caught up. For long-term investors, the bigger concern isn’t a short-term pullback. It’s that a lot of these newer, unproven companies are taking on heavy debt.

If demand cools, inflation returns, or rates stay higher than recent norms, some of these businesses will be in a tough spot…no pricing power, compressed margins, no other income streams, and no path to profitability.  They have no room for error. 

Now of course I’m not talking about your Nvidia’s and Google’s…….

Stick with the proven winners…

Established businesses with strong balance sheets, durable moats, multiple revenue streams, booming cash flow, profits, and a track record of compounding value over decades.

The shiny new AI names are fun to watch, and a few might break out. But I’d rather own the company that consistently outpaces the markets with 15–30%+ compounded returns year after year, than chase a one-year wonder with a higher chance of falling flat.

A lot of new names get thrown around. The smart way to play them, especially after big runs, is to wait for clarity and confirmation. As a long-term investor, you may think you missed a run, but a true compounder will continue to grow year over year. Sure, you may miss a new winner here and there, but there are plenty of already proven names that will take you to the promised land.

If you’re going after high-hype names, make sure to size your risk properly. Keep them a modest part of your portfolio so one miss doesn’t wipe you out. Excitement’s fine, just don’t bet the farm on what randoms on social media are throwing out.

Government Shutdown

The government shut down in early October, and we were starting to see ripple effects. Congress couldn’t agree on a new spending bill (surprise surprise), so non-essential government operations have been paused….

Until now…as of yesterday, it seems eight moderate democrats have sided with Republicans to get the 60 votes needed to reopen the government. Republicans got what they wanted until many of the disputed items come up for vote again in the end of January.

Why this mattered for the markets

• Investors rely on data (like inflation, employment, GDP) to make decisions. Without that, there's more uncertainty.

• If the shutdown dragged on, it would weigh on consumer spending, slow down loan approvals, and hurt small businesses that work with federal agencies.

• It's another confidence drag at a time when sentiment is starting to be shaky.

My take

Short shutdowns aren’t a big deal long term, but this one came at a tricky time. There were signs of the economy starting to cool a bit, and markets are nervous about AI bubbles and interest rates. A shutdown was only adding more fog to the picture.  Markets want stability, not uncertainty.

Interest Rates

The Fed cut its benchmark federal funds rate by 0.25 percentage points in October, bringing it to 3.75 % - 4%. 

Their reasons:

• The labor market is showing signs of softening. 

• Inflation is still above target but not accelerating much.

• The government shutdown is delaying key data, which adds to uncertainty. 

What it means for investors

• Lower rates > cheaper borrowing > could help near-term growth.

• A rate cut also means the Fed sees weakness ahead.

• I think the fed continues to move cautiously since inflation is still above the 2% target and there’s limited data.

• Since inflation is controlled but not fully tamed, pricing and margins still are key, so cost pressures remain a risk.

Tariffs and Trade

U.S. vs China

There was progress, in tone and message, at least. Trade talks between the U.S. and China improved in October, which lifted sentiment (for at least one day)…

But the underlying dynamics are still tense, especially with rare earth minerals.  Supply-chain risk and terms of a final Agreement are still unclear.

U.S. vs Canada

These two are not friends right now.  The catalyst was Canada using a portion of a 1987 speech by Ronald Reagan, edited to emphasize that “tariffs hurt every American worker and consumer.”

Tariff and supply-chain risk remains real and could show up in costs.

In 2024, about 75.9% of Canada’s exports were to the U.S. 

My Overall take

Tariffs may come with short-term friction, including higher costs and supply chain delays. But long-term, I think we’ll be fine if the U.S. can lock in key trade deals, especially with major partners like China, Mexico and Canada.

What gives me confidence? AI and automation. I believe they’ll make U.S. manufacturing far more competitive, without having to depend on low wages, but by driving efficiency. If we get the trade pieces right and keep investing in innovation, we won’t need to rely on cheap labor to win globally.

Long-Term Outlook for Investors

Great businesses are what you should be thinking about if you’re investing with a 3+ year lens.

Current Warning Signs…

1. Valuation risk is elevated. Big parts of the market (especially tech/AI) are priced for perfection. If earnings disappoint, corrections will likely continue beyond last week.

2. Capital expenditure spending is heavy, but returns are not guaranteed. If companies keep spending big on AI infrastructure without profits, there’s risk of margins compressing or write‑downs (A write down is when a company lowers the value of an asset on its books because it’s now worth less. This loss is recorded as an expense, which reduces the company’s profit).

3. Lower rates are a short-term solution.  If inflation picks up or the labor market continues to weaken, policy risk remains.

4. Trade & supply-chain risks matter. Even if everything seems stable now, the combination of tariffs + global linkages + capex means shocks are possible.

5. Political/regulation risk is rising. Policy changes (trade, tax, regulation) could drive outcomes more than they used to.

Given all the above, tracking fundamentals and being patient matter more now than ever.

My Take

I’m always for buying great businesses and will keep doing so.  I’m not worried because of what I invest in – proven businesses with great balance sheets; specifically high cash and low debt.  Now is not a good time to overpay, especially for a company that doesn’t have a proven track record.

• Don’t assume “good times just keep rolling.” Momentum helps, but when margin for error is small, things can reverse.

• Favor businesses with profits or strong, rising positive cash flow and those less dependent on speculative CapEx.

• Watch sectors exposed to AI hype and those exposed to trade/tariff and rate shifts (industrial, manufacturing, export‑heavy).

• Have a plan for “if things go sideways”: higher inflation, supply‑chain shock, policy surprise. See last months Macro Report… https://www.happystocks.com/p/the-big-picture-behind-the-panic 

• Time horizon matters: If you’re in it for 3‑5 years +, you can absorb short-term volatility with great businesses, but not with unproven ones with shaky balance sheets.