The economy is growing fast, but hiring has almost stopped and prices are rising faster than pay. The Fed is raising rates, not cutting them. Here is what that means, where we think we are in the cycle, and how the North Star books are holding up.
The economy is strong on paper and tight in the wallet. The Fed is raising. The money in the market is moving, not leaving.
Strong Growth, Weak Hiring, Hot Prices
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| Prices, past year | +3.7% |
| Pay, past year | about +3% |
Start with the good news. The economy grew at a 3.4% yearly pace from July through September. That is fast. But almost all of the extra business spending is going into AI data centers. Outside of AI, business investment is close to zero, according to economists quoted in the Journal.
Now the hard part. Employers added only 29,000 jobs in September, far fewer than expected, and the unemployment rate rose to 4.2%. Prices rose 3.7% from a year earlier. Gasoline was up 34% in a year, and diesel hit a record $6.52 a gallon. Pay rose about 3%. So for six months in a row, prices have grown faster than paychecks.
People feel it. Consumer sentiment fell to 48, the second-lowest reading on record. One in five families is behind on a loan payment, the most since 2010. Housing is the weakest in more than a decade. Builders’ confidence is the lowest since 2012, and the 30-year mortgage rate is about 7.24%.
The Fed is raising rates, not cutting them. It raised in September for the first time in three years, to 3.75% to 4%. It held on Oct. 28, but two members voted to raise again. By our own check at midday Friday, prediction markets put the odds of another hike on Dec. 9 at about 70%. These are crowd guesses, not forecasts.
Two more forces sit underneath all of this. Oil is above $100 a barrel because of the war with Iran, up about 75% this year. And Washington’s debt now equals the whole economy for the first time since 1946. The yearly deficit is about $2 trillion, and interest on the debt now costs more than defense. That is one reason the 10-year Treasury yield hit 5.365% on Oct. 7, the highest in almost 25 years. It has since eased to just under 5%.
Closer to the Stagflation Room
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| Value stocks | +22.9% |
| Equal-weight S&P 500 fund | +15.3% |
| S&P 500 fund | +11.7% |
| Growth stocks | +3.3% |
In September we said the economy was late in its cycle. It was running hot on AI spending, with prices also running hot. Think of it as standing between two rooms. One room is an AI boom. The other is stagflation, which means slow growth with high prices.
This month we moved closer to the second room. Hiring slowed, prices sped up, the Fed leaned toward raising, and oil stayed high. At the same time, the AI boom showed its first cracks. Alphabet lost about $500 billion of value in one day. Meta plans to sell up to $95 billion of new stock to pay for AI. Intel warned that high memory-chip prices will hurt PC sales into 2028. On Friday, a fund of chip stocks fell about 8%.
But the money didn’t leave the market. It moved. This year, value stocks, the plain and steady kind, are up about 23%. Growth stocks are up about 3%. The equal-weight S&P 500 fund, which gives every company the same small share, is ahead of the regular fund. On Friday the S&P 500 closed at 7,580.07, about 3% under its October record. That is a bad week, not a crash.
Up About 23% to 31% This Year, With Work to Do
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| North Star Faith-Based 500 | +31.4% |
| North Star Faith-Based 200 | +30.6% |
| North Star Faith-Based 50 | +29.1% |
| North Star Income $1M | +25.2% |
| North Star 500 | +25.1% |
| North Star 750 | +24.6% |
| North Star 250 | +24.6% |
| North Star 25 | +24.4% |
| North Star 100 | +23.5% |
| North Star 50 | +23.4% |
| S&P 500 fund (SPY) | +11.7% |
We went through all ten North Star model portfolios, holding by holding, against a month of the Journal. Here is the plain version.
Measured at today’s weights, every North Star book is up about 23% to 31% this year, against about 12% for the S&P 500 fund. Over Thursday and Friday together, every book did better than the S&P 500 fund. Since we put the first third of our reserve to work on Oct. 17, eight of the ten books are flat or up, while the S&P 500 fund is down about 1%.
What worked: oil companies, healthcare, defense and everyday staples. Lilly, Exxon, Lockheed Martin, Chevron and Procter & Gamble added the most this month.
What didn’t: the AI build-out and gold. GE Vernova, Nvidia, Alphabet, Caterpillar, TSMC and Meta took the most away. Gold is down about 10% this year and fell on Friday’s down day. It has not acted like insurance this year, and we owe you a written answer on how much of it to keep.
What we are watching closely: a group of chip and AI hardware stocks that ran far ahead this year and fell 17% to 30% this month, and a few small positions that are down sharply for the whole year. Philip Morris also cut its 2026 outlook. None of these has been sold. Each one now needs a reason to stay, written down.
The plan for the reserve has not changed. The next third is written for the week of Nov. 3, or sooner if the S&P 500 falls to 6,863. That decision comes in writing after the vote.
Ideas for the Model Portfolios, Not Yet Bought
Southern Company, Duke Energy, Colgate, Kimberly-Clark, Amgen and Waste Management, this month.
What a two-year Treasury pays. Part of the reserve could hold two- to five-year Treasurys.
Caterpillar this month, with a record $78 billion backlog. TSMC raised its forecast three times.
These are ideas we are studying for our model portfolios. We have not bought any of them, and none of them is advice for your account.
Steady companies we do not own yet. Electric utilities like Southern Company and Duke Energy rose about 12% this month. Household names like Colgate and Kimberly-Clark, the drug maker Amgen and Waste Management rose 13% to 16%. These are the kinds of businesses that tend to hold up late in a cycle.
Locking in today’s interest rates. A two-year Treasury pays about 4.65%. Part of the reserve could hold two- to five-year Treasurys instead of only three-month bills, so it keeps earning if the Fed stops raising.
Good companies on sale. Caterpillar has a record $78 billion order backlog and is sold out of power turbines into 2030, yet its stock fell about 25% this month. TSMC raised its sales forecast three times this year. We already own both. The question is whether part of the next third should go to them.
Fifteen Minutes This Weekend
Find the fact sheet for your biggest fund. See how much of it is in the ten biggest companies, and how much is in tech and chips.
Money you need soon is safer outside the stock market. A 13-week Treasury bill paid about 4% at its latest sale.
If your savings account pays under 1%, you are losing ground to 3.7% inflation. The average money-market account pays 0.46%.
Mortgage rates are about 7.24%. If you plan to buy or refinance, run the payment at today’s rate, not last year’s.
How much of your money stands under the clouds?
Nobody knows exactly when this cycle turns. What we know is the setup: strong growth, weak hiring, hot prices, a Fed that is raising and a stock market that leans on a few giant companies. Our model portfolios already lean toward the parts of the market that have held up, and our next steps are written down.
You don’t wait for the first raindrop to find your umbrella. The clouds this month gathered over jobs, prices and the AI giants. Fifteen minutes is usually enough to see how much of your money stands under them. Bring your statement.