By: Paul Morrone
If your only gauge to assess state of the country’s economy, geopolitical unrest, trade affairs and social issues was the S&P500, then you’d be forgiven for making a gross miscalculation of reality given this very limited amount of perspective. As we enter a government shutdown on the first day of the quarter, tensions remain high. Washington is polarized (and gridlocked), global trade is in a state of flux, the labor market is weakening and the outlook on inflation is still very uncertain. How about that for a grim picture? But that is on the one hand. Any well-rounded economist will tell you there are always two hands to an argument, and maybe the other hand is what is driving the stock market forward through 2025. Before we get to that, however, let’s address some of the key headlines that are playing in the first few days of the 4th quarter.
Government shutdown: While this should not come as a surprise given the inability of our country’s leaders to agree on, well, anything, we find ourselves at the mercy of the politics game once again. Fortunately, for equity investors, there is some historical precedent to reference as this is now the 21st government shutdown on record. They’ve lasted anywhere from 1 day (in multiple instances) to 34 days (2018) and stocks have responded quite well in most cases and on average. In fact, according to an article posted on Bloomberg assessing the equity market response before, during and after a shutdown, the average has yielded a net positive S&P500 return across all observations. From a practical standpoint, however, it may delay the release of some of the inflation/labor data that the Fed and investors rely on as the agencies that report this information are currently running on a skeleton crew which could cause some short-term angst. As an investor the appropriate response here should come as no surprise: keep calm and carry on.
Concentration: It’s no secret that the S&P500 is more concentrated now than at any point in history, meaning that the 10 largest companies making up nearly 40% of the index in terms of market capitalization (which directly correlates to the index’s performance). This presents both risk and opportunity. The pessimist would say ‘what goes up, must come down’ and that the relentless rise in growth/tech stocks can’t last forever. The optimist would say there are another 490 stocks from which to choose from that can create opportunity as they are likely under-represented in most index-based portfolios. We are cognizant of the concentration risk in our portfolios and are taking steps to balance the risk/reward profile for our clients. This means incorporating dedicated value positions and expanding our allocations outside of the mega cap space so that if there is material outperformance of value, mid or small cap stocks (or an underperformance/meltdown of big tech relative to other areas of the market) that we will be positioned to potentially benefit from it.
Inflation/Fed/Interest Rates: For the first decade of my professional career, inflation was rarely part of the conversation. I remember back in the mid-2010s, we would be setting planning assumptions in client plans and while consumer price index (CPI) averages 3.2% historically, it had been running at sub-2% for so long that people often forgot that we needed to include an inflation assumption in our long-term cash flow reports. Oh, how the tides have turned. Fast forward to today, and it seems that it is all we can talk about. And it remains one of the biggest, if not the biggest, risks that investors face. Persistently high inflation will cause the Fed to pause, or worse, do an about-face, on their rate-cutting course. This could cause a repricing of all assets – equities and fixed income, specifically – as so much is driven by the 10-year treasury rate and the expectations on the future trends of this benchmark rate. Needless to say, we’re keeping a keen eye on the data and information that becomes available each month.
So back to those numbers that look so good. The S&P500 logged another solid quarterly gain at nearly ~8% – nothing to scoff at considering this puts the US bellwether index up nearly 14% year-to-date (YTD) through 9/30/25. It’s an even better story outside of the US (shock!) where emerging market equities (as measured by the MSCI Emerging Markets Index) are up over 10% for the quarter and over 30% for the year. Developed international stocks (as measured by the MSCI EAFE Index) started hotter this year and lost a little footing to the US in 3Q25 where they underperformed the US (~4.5% increase) in 3Q, however they are still handedly outperforming domestic stocks for the year and have posted gains of nearly 27% through the end of the third quarter.
What this means is that it’s been a great year for globally diversified investors who have benefited from the lower volatility that international stocks have provided during this time and also from the outperformance of the respective non-US equity markets. It’s been a long battle for those diligent enough to hold international stocks in their portfolio, but a period like this has highlighted the benefits of a disciplined investment approach and how diversification has the potential to not only mitigate short-term losses but magnify returns over the same period.
And let’s not forget about everyone’s favorite asset class to hate – fixed income. Returns so far this year have not been nearly as stellar as equities, but even the Bloomberg U.S. Aggregate Bond Index (which measures high quality corporate fixed income) has posted quarter-to-date (QTD) and YTD gains of 2% and ~6.5%, respectively. It’s a welcomed breath of fresh air for those waiting for the tides to turn after a 3-year bear market in fixed income. The outlook is still somewhat cloudy for fixed income, however, as interest rates, the Fed and inflation will have a large impact on how things continue through the remainder of 2025.
Across virtually all our portfolios, we’ve also benefited from a meaningful allocation this year’s golden child – gold! – which has posted an impressive quarterly gain of almost 17% and is up over 46% for the year. This is yet another piece of the puzzle that helped soften the April blow and has been a key additive to our portfolio performance for the past several years.
What this is meant to illustrate is that the US Stock market is not the end-all-be-all. We have had and, will continue to have, a ‘home team’ bias (meaning an over-allocation compared to total global market cap) to US stocks. Given the return profile, volatility and location of our clients, this is not only logical, but almost a mandate. That being said, we also believe in and value the opportunities available in other markets and asset classes, so it should come as no surprise that we have held international stocks, fixed income and other diversifiers such as gold for as far back as I can remember. It doesn’t work out in every specific period, but long-term outcomes are not measured in 3 month or 1-year snapshots.
Remember that ‘other hand’ that I referred to earlier? There are some tailwinds to highlight, notably positive GDP growth, continued corporate earnings growth and the potential for more rate cuts in the future here in the US. We also have a dollar that continues to weaken and accommodative central bank policies in many other nations across the world. All these support higher stock prices both at home and abroad. We’ll see which hand dominates the 4th quarter, but given the relentless run stocks all over the globe have seen this year, it would not come as a surprise to see a short pullback in the near future in the 8-12% range. This is not meant to be a prediction by any means, but if it does come to fruition, you can certainly make the argument that we were overdue.
Regardless of the investment climate in the short-term we will continue to support and guide you through both good and bad markets. We had several conversations with clients throughout the year whose knee-jerk reactions were to not look at statements during the April Tariff Tantrum. Those who did were surprised to see that their losses, even in the days following Liberation Day, were not as bad as they had thought. Back to diversification – it does work, just not all the time (I’m looking at you 2022).
The opinions voiced in this presentation are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Investing involves risks including possible loss of principal. . No investment strategy or risk management technique can guarantee return or eliminate risk. Any economic forecasts set forth may not develop as predicted and are subject to change. All indices are unmanaged and may not be invested into directly. Past performance is no guarantee of future results.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
The prices of small and mid-cap stocks are generally more volatile than large cap stocks.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Precious metal investing involves greater fluctuation and potential for losses.
Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
The MSCI EAFE Index is an equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.
The MSCI Emerging Markets Index captures large and mid cap representation across 24 Emerging Markets (EM) countries.
The S&P 500 is an unmanaged index of 500 companies used to measure large-cap U.S. stock market performance.
Consumer Price Index (CPI): Measures the monthly change in prices paid by U.S. consumers. The U.S. Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending.
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