Market Update December 2025

Market Update October 2025

ECONOMIC AND MARKET REVIEW AND OUTLOOK, October 2025

“Don’t gamble. Take all your savings and buy some good stock and hold it ‘till it goes up, then sell it. If it doesn’t go up, don’t buy it.”  –  Will Rogers, famous U. S. humorist

Summer Recap

During the third quarter, most financial assets trended higher after turbulence earlier in the year. The S&P 500 and NASDAQ 100 posted strong gains among US indices. Cyclical averages such the Dow Jones Industrials and Transports showed moderate gains, while smaller cap indices rose sharply in anticipation of easier monetary policies.

Fixed income markets posted modest gains, with 10-year Treasury yields edging down within the 4.00-4.50% range. West Texas Intermediate (WTI) oil lifted slightly, remaining in the 10% band. Commodities such as copper and lumber fell, while precious metals such as gold soared.

The Fog of Uncertainty Lifts, Somewhat

Tax Bill. As mentioned last quarter, the tax bill was passed ahead of expectations and should provide a boost to corporate capex spending and the overall economy next year. Deregulation initiatives, particularly for financial institutions, are moving forward and expected to be finalized during the coming months.

Fed Shutdown. October brought another government shutdown, with Congressional Republicans and Democrats at a deadlock to restore funding. If the impasse lasts less than a month, negative effects should be temporary and reversable once agreement is reached. However, if it continues six weeks or longer, the economy will take a bigger hit. Although government shutdowns have occurred over the past two decades, they are usually resolved once disgruntled voters complain about the lack of services, pressuring one party or the other to capitulate.

Tariffs Negotiations. Tariff accords have been reached with many countries including the U.K., Eurozone, Japan and South Korea. However, these are broader agreements, with details still needing to be worked out. Additionally, the tentative agreements have been subject to court challenges. The US Supreme Court is scheduled to hear arguments in November with a decision hopefully coming by the end of the year.

Sectoral tariffs have also been imposed for a variety of industries, such as semiconductors and pharmaceuticals. Negotiations are proceeding between the Administration and companies on a one-by-one basis. Contentious items with China remain far from resolved, as access to US chips by Beijing and rare earth metals by Washington creating new uncertainties. Our view is that both sides do want an eventual deal — but the process will be messy and take time.

AI – A Glass Half Full or Half Empty?

AI, or Artificial Intelligence, has been a prevalent theme in the markets since late 2022. At this point, some investors are questioning when and whether the spending on this new technology will be translated into sales to end-use customers. While there have been comparisons to the dot-com bubble of the late 1990s, AI has relevant differences that should be considered in market evaluation.

• There is anecdotal evidence of end-use AI, particularly in the finance and healthcare sectors.
• Tech valuations, though stretched, are not at 2000 levels.
• Most of current spending have been by large tech companies with strong profits and robust cash flow, lessening any borrowing needs.
• Initial Public Offerings (IPOs) of nascent AI companies, are still subdued relative to past cycles, especially dot-com. An overheated IPO environment would be indicative of excessive speculation.
• Last, but not least, the Fed is currently easing monetary policy. In other cycles, including dot-com, the Fed was tightening monetary policy by raising the short-term Federal Funds rate.

At this point, we feel that the potential from AI is indeed compelling until red flags, such as the ones listed above, begin to appear. As always, our investments favor seasoned companies with consistently positive profits, cash flow and strong balance sheets.

The Federal Reserve – Policy and Future Composition

We believe that the Fed will lower the Fed Funds rate one or two more times this year. Current Fed Board members are generally leaning toward a gradual, data-dependent approach, especially due to lack of economic reports caused by the government shutdown.

The outlook for Fed policy in 2026, however, is quite murky because of the White House’s insistence that rate cuts remain aggressive. The Administration also seeks to change the composition of the Board by attempting to fire Governor Lisa Cook (which is being challenged in the Supreme Court) and appointing a new, more dovish Fed Chair when Jerome Powell’s term expires in May.

Fourth Quarter Outlook

• Though the government shutdown is causing a lack of current economic reports, private reporting largely indicates moderate economic growth, with a continuation of the “no hire, no fire” labor market. The experience of the last several years demonstrates it takes a lot to push the US economy into a contraction.
• Consumer spending, though impacted by the lower income half of households, is being more than offset by the stronger upper half.
• Corporate profits for the third quarter are forecasted to be robust after a surprise uptick in the spring.
• The Fed will gradually ease rates after pursuing a restrictive policy for the last few years.
• We continue to add to international equities, further diversifying portfolios while taking advantage of growth potential abroad. The White House has stated it wants a lower dollar, which would also provide a tailwind to foreign stock and bond returns for US investors.

MARKET UPDATE SEPTEMBER 2025 – INTERNATIONAL EQUITIES

ECONOMIC AND MARKET REVIEW AND OUTLOOK, July 2025

“Nervous energy is a great destroyer of wealth.”  –  Fayez Sarofim, noted financier

Mercurial Markets

Spring of 2025 was a roller coaster, both in the U.S. and globally. After an initial drawdown, most asset categories rallied sharply then continued higher through the balance of the quarter. After enduring a mini-bear downturn of 20% before a quick V-shape rebound, the S&P 500 rallied 10.9% in the second quarter. The NASDAQ and foreign markets exhibited similar behavior, with bonds rising modestly. Commodities rose, but oil slipped late and finished lower.

“Liberation Day” occurred on April 2^nd with sharply higher reciprocal tariffs by the U.S. Administration on most countries. The global Average Tariff Rate (ATR) went from 2.5% to about 26-28%. Most economists factored in a 10% baseline ATR, and subsequently the equity, fixed income markets and the U.S. dollar sold off, which is rare. Fortunately, the White House delayed the tariffs for three months, with the exception of China. The ensuring tariff escalation between the two countries was eventually diffused with a broader agreement in mid-May.

In June, the Israel-Iran conflict reached a boiling point, with the Israelis launching pre-emptive air strikes on Iranian nuclear facilities. After Tehran responded with missile attacks and the U.S. sent its heaviest bombs to penetrate the Fordow nuclear installation, Iran retaliated by launching missiles at the Qatari U.S. air base. A ceasefire finally ensued, with negotiations slated to begin in coming weeks. After it became evident that Iran would not try to attack ships in the Straits of Hormuz, West Texas Intermediate (WTI) Oil, which earlier traded in the mid-50s, spiked to $78 per barrel before falling back to the mid-60s.

Other Developments

The new tax bill was passed ahead of market expectations, making most of the 2017 tax cuts permanent. Overall, it is a short-term stimulus for the economy and pushes out the August debt ceiling for at least another year. However, this may turn out to be a long-term negative for the federal budget deficit, unless tariff revenues are significant.

The deregulatory process is beginning, with larger banks given looser capital requirements to free up more capital for lending, dividend increases and share buybacks. Beyond the financial sector, additional moves could include freeing up government-owned lands for oil and rare earth exploration.

Meanwhile, the economy and employment continue to grow at a modest pace. Consumer spending has been distorted by “pull forward” demand or hoarding, with consumers buying ahead of expected higher prices due to tariff. As this also impacts corporate inventories, this may result in some giveback for both in the second half of the year.

A clearer indicator of the economy right now is the labor market, which is tepid but not weakening significantly. The uncertainty of what the overall tariff policy will be is causing companies to put hiring plans on hold. However, many CEOs remember the post-Covid employment problem, when corporations had great difficulty rehiring the same workers they had previously let go. In essence, employers are not aggressively hiring — nor are they firing workers.

Perhaps the biggest surprise of 2025 so far is the weakness of the U.S. dollar. Although economists and strategists foresaw a correction in the greenback due to overevaluation, the magnitude surprised everyone. Foreign repatriation of assets and massive fiscal stimulus in the Eurozone (caused by increased defense spending in NATO countries) were major factors in the dollar’s decline. Germany, in particular, has run low fiscal deficits, so it has considerable room to boost economic growth.

Meanwhile, the Federal Reserve has been in the background since the inflationary outlook is extremely unclear. With the tariff process still ongoing, Fed officials are cautious about lowering short-term interest rates. Standard economic theory maintains that tariff impacts are temporary. However, in the current situation, the price effects are more protracted and may last awhile.

The Second Half Outlook

• It is our forecast that the Fed will begin to lower rates once or twice later this year, probably after the summer.
• With the passage of the new tax bill and deregulation occurring, much will depend on the end point for the tariff policy. Currently, the global ATR for U.S. imports is between 13-15%, with changes occurring almost daily. A pessimistic outcome would peg the ATR closer to 18%, whereas a more optimistic one would settle closer to 10%.
• Trade is significant but not as important to the U.S. as it is to many of our trading partners. The contractionary effects on economic growth will be offset by both the tax bill and deregulation. After the volatility of Liberation Day, we assigned a 50-50 probability of a recession. However, with the overall de-escalation of the tariffs, we now see about a one-third chance of a recession within the next 12 months, similar to where we forecasted it for most of the last two years.
• We re-emphasize the importance of diversification in portfolio construction. This quarter we continued to add to International Equities from domestic stocks. Core Equities featured a move back to AI (Artificial Intelligence) exposure, after the DeepSeek threat receded. Always looking for improvements to portfolios and the fixed income component of nontaxable accounts, we have switched to a less expensive ETF (Exchange Traded Fund) which provides less exposure to longer maturity U.S. Treasury debt, a concern of the recent tax bill passage.

Final thoughts. Although stocks may experience a correction due to tariff headlines, keep in mind that a rapid but quick drawdown of 20% has already occurred in April. Following similar scenarios in 2011, 2016, 2020 and 2022, the market rose to all-time highs. Indeed, the April 9th reversal saw the S&P 500 jump 10% in one day – normally, the average return for one year. Time in the market is a concept worth keeping in mind.