"Economy Growing 3.8% While Experts Predicted Disaster"

"The Database That Predicted Tech's Next Move Just Turned Bearish"

KR Opinion

As we move deeper into September and approach the end of Q3, the economic metrics emerging from this period present a fascinating contrast to earlier predictions and market expectations. Looking back to last April, when markets had declined by 20%, the prevailing narrative on Wall Street centered around fears that newly implemented tariffs would trigger a fresh cycle of inflation. This rhetoric dominated mainstream financial news cycles, effectively shaping how market participants perceived and responded to economic developments. Most traders and investors, caught up in this narrative, bought into the doomsday scenario that was being painted.

The current market environment reflects a significant evolution in how trading operates, mainly driven by generational shifts in market participation. Today’s markets are increasingly dominated by individuals between the ages of 30 and 50, who represent the primary trading demographic across both institutional and retail sectors. This group has become particularly influential over the past five years, coinciding with a massive influx of new market participants. The democratization of trading through commission-free platforms, fractional share ownership, and various accessible trading strategies has made market participation nearly universal. It’s becoming increasingly complex to find someone who isn’t engaged in some form of market trading, and while individual positions may seem small, they aggregate into significant market-moving forces.

This widespread participation has fundamentally changed market dynamics in several key ways. The speed at which information moves through social media platforms like X has increased dramatically, giving rise to what can be termed “swarm trading” behavior—news and market-moving ideas spread with unmatched velocity, resulting in greater volatility and trading volume. The emotional aspect of trading appears to have intensified compared to previous generations, with market sentiment exhibiting more extreme reactions and catastrophic thinking patterns than in earlier decades.

Having observed nearly five decades of market evolution, these changes reflect not just shifts in participant demographics but also fundamental modifications in market structure itself. The shift from decimalization to fractional shares and instant digital access has fostered an environment where market characteristics continue to change rapidly. Yet, this creates a paradox: while markets can now react with lightning speed, the economic data they respond to moves much more slowly. Most economic metrics are backward-looking, creating a disconnect between swift market responses and the slower-moving fundamental data that should theoretically drive those reactions.

The April market decline exemplifies how these forces come together. The extreme sentiment that dominated that period peaked on a single trading day, when the S&P 500 saw an 11.5% intraday range before closing near the session high. Interestingly, this day marked the exact bottom of the decline, and coincidentally, Trump tweeted that same day, suggesting it was a good time to buy stocks. Since that key moment, markets have gained approximately 35%, resulting in a sharp recovery similar to the Federal Reserve's interventions in 2020.

Despite this strong recovery, the Federal Reserve's rhetoric has continued to emphasize potential inflation concerns stemming from tariffs. While the Fed was careful to suggest that any inflation would be a one-time spike rather than a sustained cycle, even that modest expectation has proven to be incorrect. Recent comments from Federal Reserve officials indicate that tariffs are being absorbed by producers, retailers, and distributors rather than being passed on to consumers as initially expected. This absorption has prevented the inflationary pressure that many economists predicted, once again demonstrating how market theories can differ significantly from actual results.

The latest GDP data support the idea of stronger-than-expected economic performance. The economy grew at a 3.8% annual rate, while the GDP deflator was at 2.1%. These numbers are especially significant when compared to the Federal Reserve’s forward guidance, which indicates that inflation will remain above 2% for the foreseeable future, based on their dot plot projections. This highlights a gap between current reality and institutional forecast models.

To put current growth rates in historical perspective, GDP growth in 1986 reached 6.7%, suggesting that current levels, while strong, are not operating at extraordinary historical levels. However, the metrics that Federal Reserve officials use to guide policy decisions, along with traditional earnings growth models, appear to be based on frameworks that are being challenged by real-time market developments. These legacy models may not adequately capture the dynamics of the current economic environment.

Recent employment data further supports the narrative of economic strength. Initial jobless claims fell by 14,000 to 218,000, well below expectations of 238,000. Continuing claims also decreased by 2,000 to 1.926 million. These employment figures show no signs of weakness and suggest a robust labor market that contradicts concerns about economic slowdown. Interestingly, these substantial numbers persist even as current immigration policies have reportedly reduced immigration flows, which some analysts had viewed as a potential supporting factor for employment statistics.

The Federal Reserve finds itself in a challenging position, appearing somewhat out of touch with the robustness of real economic data. Their ongoing reliance on traditional rhetoric and models appears insufficient for tackling the current economic conditions. This institutional inertia also has political aspects, as even Federal Reserve statements appear to be influenced by broader political narratives rather than purely data-driven analysis.

What many market observers may overlook is the ongoing impact of what could be called the “Trump effect” on market psychology and performance. This impact appears to be driving markets to levels that many traditional analysts believe are unsustainable, primarily because they continue to rely on outdated analytical methods and backward-looking views. This reluctance to update analytical models to match current realities might be causing many to miss key market opportunities.

Looking ahead to the final days of Q3, which ends on Tuesday of next week, there is potential for some tactical positioning as institutions engage in quarter-end window dressing to optimize their book presentations. This activity is likely to focus on Monday and Tuesday, as fund managers finalize their adjustments to their positions. As we move into Q4, the market may establish a wider trading range, setting the tone for year-end positioning.

However, one concerning development as Q4 emerges is that the WaveTech Database is beginning to demonstrate some weakness. This trend could signal potential headwinds for technology-dependent sectors and may require careful monitoring as we transition into the fourth quarter.

The overall sentiment remains positive, driven by strong economic data, resilient job markets, and controlled inflation. Instead of the economic slowdown that seemed likely earlier in the week, current signs point to ongoing strength, which could even lead to calls for the Federal Reserve to cut interest rates. Such policy changes would boost lending spreads and provide extra economic stimulus, further supporting market performance.

The broader story indicates that we’re witnessing a real-time evolution in how markets function, with traditional analytical methods being challenged by new patterns of participation, information flows, and economic dynamics. Understanding these shifts will be vital for positioning portfolios and developing investment strategies as we progress through the rest of this year and into 2026 and 2027. The economic landscape appears to be shaping a new playbook, and those who adapt their thinking accordingly may be best equipped to capitalize on these ongoing changes.

WaveTech Database