Third Quarter 2025

Following Market Trends

At the end of my July Newsletter I noted: Marty Zweig, a legendary stock market investor, is well known for his strong belief in following market trends and avoiding trying to "fight the tape". He emphasized the importance of being in harmony with the market and believed that fighting trends were "suicidal" because they have a higher probability of continuing than not. I then said, “I look forward to a great third quarter.” So, overall, we had a great third quarter. Unfortunately, the beginning of the fourth quarter has brought a shutdown of the federal government. Without getting into the merits of either side’s position, our country has become increasingly dysfunctional. As I’ve indicated in the past, the markets do not like uncertainty. As the days pass with no resolution, markets are feeling the pain of displaced workers, and the financial losses from the curtailment of payments by the federal government.

Softening Economy

What appeared to be a strong labor market is undergoing serious change. The U.S. Labor Department has revised their reported job growth numbers and each time the revision is downward. Since the Federal Government shutdown figures for September are unavailable, other outlets are indicating that the drop in job availability in September was significantly less than other recent indicators. The service sector, in particular, is in contraction, as employers are unsure of the impact of tariffs on their businesses and the potential for trade wars. In addition, entry level jobs, in some cases, are being replaced by artificial intelligence (AI).

A significant indicator of this issue is that the Federal Reserve (FED) lowered their interest rate on September 17th, indicating that they were concerned with the cooling of the labor market as hirings were slowing down. What made this more significant is that the inflation rate is still higher than the FED’s target of 2%.

A Look at the Numbers

The Dow Jones Industrial Average was up 5.5% for the quarter and 9.1% year to date. In a similar manner, the S&P 500 was up 8.2% for the quarter and 13.7% year to date. The Mid-Cap 400 went from -0.6, to 4.6%, year to date while the SmallCap 600 was at 2.9%. The best for the quarter was the MSCI ACW ex-USA (international index), going from a positive 16% at the end of June and growing to 23.4% by the end of September. The 10- year U. S. Treasury grew from 4.23% to 4.15, and the Aggregate Bloomberg average went from 5.30% to 4.93. Remember that as interest rates on bonds go down, the value of the bonds goes up. Also please note that non-U.S. securities benefited by the dollar value going down, thereby strengthening foreign exchange rates.

What’s Good?

While we are waiting for third quarter earnings reports, all indications are that large companies’ earnings will either meet or exceed expectations. The increasing impact of AI (artificial intelligence) is proving of real value, as more companies are using it to reduce the need for employees and increase efficiency. In addition, because of the many questions on the impact of tariffs, companies have been careful with their spending. In some instances, deferring capital spending and/or reducing hiring new employees.

What’s not so Good?

The value of the dollar, when measured against major foreign currencies, has diminished in value. This means that the goods and services we sell abroad have become less expensive. Unfortunately, the reverse is true for goods and services we import. When you add into the mix the added costs of tariffs, it means purchases from foreign sources become more expensive. This in part may be why the consumer has cut back on their spending. With rising costs due to inflation, tariffs and the shrinking dollar all adding up to higher prices, while earnings are not keeping pace. 

 Trade Wars

Relative to many countries the United States for years had modest tariffs and fees for goods and services entering our country. For this reason, countries like China, South Korea, Vietnam, India, and others, were able to use their relatively lower costs of production to gain dominance in some sectors of the U.S. economy without offsetting exports from the U.S. This imbalance has led many industries, that were once located in the U.S. to go to foreign countries where costs were lower. Because that was not recognized as a strategic problem in the U.S., we allowed it to continue. The idea of the tariffs is to bring some of this production back to the U.S. by making it more expensive to import some products into the U.S. The difficulty that we face is that the capacity and capability of producing many of these products is no longer an option. A strong case in point is that rare earth minerals refinement is almost entirely done in China. While the U.S. has the raw materials, we do not have the capacity to refine them. The cost of such refining, the time to build plants, and the expertise needed are not available at present. China has a monopoly on this sector that contributes to many of our advanced systems in cars, planes, military uses and AI. China is leveraging this advantage to get favorable treatment from the U.S. with tariffs.

What might we expect

The tariffs and the trade policy that is being pursued by the U.S. is still evolving. The world is interconnected, and it is difficult for any one country to be entirely self-sufficient. I believe that next year we will see the tariff issues, and trade war issues settle down. This will allow businesses to feel more confident in making spending decisions. In addition, consumers are going to benefit from the sharp reduction in taxes. These two changes may have the effect of boosting the economy with a higher growth rate.

Ed Mallon