Stock markets climbed this quarter while the Federal Reserve cut rates by 0.25%. Despite some short-term volatility, stocks ended the quarter on a positive note. Continued strong consumer spending may help to stave off a recession in the near term but it’s possible that growth may slow again in mid-2026 as the effects of tariffs and lower immigration work through the economy.
Economic Snapshot
Labor Market Cooling: Job growth is slowing, but unemployment may not rise much due to a smaller labor force, partially from increased deportation efforts. Wage growth should remain steady.
Inflation is Warming Back Up: Inflation is rising again, now at 2.9% year over year in August (up from 2.4% in April). Looking ahead, tariffs, which generally have a greater negative impact on lower-income households, and tax cuts, which are expected to be more beneficial for higher-income households, could push inflation above 4% by mid-2026, well above the Fed’s 2% target.
Consumer Spending: Despite mixed signals, consumer spending is still strong. Risks still remain, especially with trade policy uncertainty.
Growth: The economy continues to grow, but at a slower pace than recent years, helped by government stimulus and higher household wealth.
Stock Markets
U.S. Mega-Cap Stocks: Large U.S. companies, especially in tech, look expensive compared to the rest of U.S. companies . AI enthusiasm has propelled stocks to all-time highs, but stock prices have outpaced earnings growth. It may be wise for long-term investors to diversify beyond these names in case the AI boom fades.
The US Dollar & International Stocks: The U.S. dollar has dropped and may decline further as the Fed cuts rates. There are mounting concerns about too much money concentrated in U.S. assets, the overall health of the US economy, and uncertainty in government policy. International stocks have outperformed U.S. stocks this year and are still trading at a discount in comparison. With a weaker dollar, international markets may continue to do well as investors diversify globally.
Bonds: Higher starting yields mean current bonds could offer solid returns, even as the economy slows. There’s no strong reason to favor any single bond type right now, but quality bonds are likely to perform well.
Portfolio Re-balance: Recent stock gains have made many portfolios riskier, especially if you haven’t rebalanced. Now is a good time to check your investment mix and make sure you’re diversified. Investors in advisor-managed portfolios (like those at Altruist) have likely been rebalanced throughout recent market movements.
What’s Next for Interest Rates?
After nine months on hold, the Fed lowered interest rates in September. They’re trying to balance a few things:
- Keeping inflation in check (which is currently above their 2% target)
- Maintaining a low unemployment rate
- Supporting the economy, especially areas like housing and small businesses that benefit from lower rates
The bond market expects up to four more rate cuts by mid-2026, with two possibly coming before year-end. More cuts could help sectors that have been struggling or help labor market weakness, but the Fed will need to weigh this against rising inflation.
Government Shutdown Update
As of now, the government has been shut down for about 15 days due to a budget standoff in Congress. Here’s what you need to know:
- Essential programs like Social Security and Medicare are still running, though some payments could be delayed if the shutdown drags on.
- Federal employees aren’t being paid during the shutdown but are entitled to backpay later.
- Historically, shutdowns can cause short-term market volatility, but they haven’t had long-term effects on the market.
If the shutdown lasts longer or combines with other economic troubles, it could have a bigger impact.
Looking Ahead
September’s rate cut marks a shift after a long period of higher rates. While the future is uncertain, history shows that markets can be volatile in the short run but tend to recover over time.
Staying focused on your long-term financial plan – and being ready to adapt – remains the best way to navigate changing markets.
If you have questions about your plan or want to discuss your investments, please reach out. I’m here to help you stay on track, regardless of what the headlines say.
Resources
https://www.manning-napier.com/insights/september-2025-perspective
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