Q3-2025 Market Results
Another good quarter for the markets. The S&P 500, our preferred measure of U.S. stock markets, was up +8.12% for the quarter, and 14.83% year to date (YTD). International markets were up, but again were lower than U.S. markets at +4.08% for the quarter, but a very strong +22.51% YTD. Emerging Markets were up strongly at +9.46% for the quarter and +25.04% YTD. Intermediate bonds had an OK return for the quarter at +2.03% and +6.13% YTD. Short Treasuries were slightly up for the quarter at +1.12% and +3.97% YTD.
Portfolio Thoughts
The S&P 500 had a relatively consistent positive run for the quarter, except for a short drawdown at the end of August. Global stock markets had a very similar look. Bonds had a consistent positive run for the quarter without any noticeable drawdowns. Bonds did have a slight uptick after the Federal Reserve (Fed) reduced interest rates in September, but the bond recovery we’ve been talking about since 2022 has still not happened. It is a good sign that bonds responded to the interest rate change and may experience a broader recovery as interest rates get closer to normal.
Q3-2025 Notes
Last quarter I spent some time talking about how in the first quarter we had a definite negative market narrative at least partly because of the tariff policy being put into place by our President. Then, in the second quarter, the narrative improved as it seemed that the predicted trade disaster from tariffs did not happen. Fast forward into the third quarter, and that more positive narrative has held on. In fact, the S&P 500 hit new all-time highs in September. The market narrative remains positive, and we feel it will stay this way until something major and more negative happens.
Washington Has Accomplished Many Trade Deals
Looking back through the end of the third quarter of 2025, we can see that Washington has accomplished many trade deals that are helping the global economy adjust to the new U.S. tariff regime. And we feel these trade deals are part of the reason the market narrative has been positive. Although not perfect, it does appear that many countries want to keep trade as open as possible with the U.S. Currently, we have trade deals with Cambodia, China, the European Union, Indonesia, Japan, Pakistan, the Philippines, South Korea, the United Kingdom, and Vietnam. Given the limited time since the tariffs were introduced, it is not a bad list, but it still lacks any agreement with Canada or Mexico, our two biggest trade partners. We think this makes some sense, as those deals will be much more complicated due to the USMCA trade deal already in place. That deal was put together during President Trump’s first term, and it certainly seems he plans to change it.
Federal Reserve Reduced Interest Rates
That brings us to the present, where we’ve seen the Federal Reserve (Fed) reduce interest rates for the first time since December 2024. Although a relatively small cut of 0.25% (25 basis points), it was enough to encourage the stock market momentum to continue. The general feeling is that the Fed will reduce rates further at its upcoming November and December meetings, although we feel this is not a given depending on inflation results. Although some economic measures are of concern for the general economy, there are as many or more that are positive. Gross Domestic Product has shifted up to 3.8% in the most recent estimate for the second quarter of 2025. In fact, by far the biggest issue we have to deal with is the new occurrence of a government shutdown that started at midnight on October 1, 2025—more on that in the next section.
Global Outlook
We want to follow up on domestic policy for today’s Global Outlook and talk about the recent government shutdown. Shutdowns have been a normal political struggle between the two major parties. Going back to 1981, we see that Ronald Reagan oversaw eight shutdowns, with none lasting longer than three days. George H. W. Bush had one shutdown and Bill Clinton had two, with one lasting 21 days. Barack Obama had one shutdown of 16 days, and Donald Trump had two shutdowns in his first term. The December 2018 one lasted 35 days, the longest in U.S. history.
Why Do Government Shutdowns Occur?
Government shutdowns occur when Congress cannot pass the necessary appropriations bills to fund the various government agencies. In the Trump 2018 shutdown, some appropriation bills were passed, which meant that the shutdown was only partial, with some agencies continuing to operate. This shutdown in 2025 has no appropriations bills passed, so it is a complete shutdown. When a shutdown occurs, it means that some employees are furlough exempt, meaning they report to work but are not paid until funding returns. On the other hand, furloughed employees don’t report to work and are not paid, unless they keep their jobs and funding returns.
The December 2018 shutdown occurred because Republicans and Democrats could not come to agreement on funding for the U.S.-Mexico border wall. This 2025 shutdown is caused by Democrats holding the line regarding healthcare funding they see as essential. Republicans offered a clean funding bill, with no added partisan spending, that would fund the government into November. They also offered to negotiate about healthcare funding if Democrats sign the extension into November. Democrats won’t sign it because they feel healthcare funding is essential and will generate positive voter sentiment. They also worry that Republicans will pull a bait and switch and not negotiate about healthcare funding if they sign the extension. These are fair points from both parties, and are part of the reason some are expecting this shutdown to last for some time. Which side will blink first? From our view, this shutdown is not about which party is the instigator; we think the supercharged partisanship in Congress is the underlying reason the two sides can’t find middle ground.
Effects of the Shutdown
The effects of a shutdown are reasonably well understood. Emergency personnel stay on, and the National Weather Service continues to operate. Members of Congress work and are paid, and Mail Delivery continues. Military operations and veterans’ benefits will continue, though some workers will not be paid until after funding is returned and they get back pay. Air traffic control also continues, so flights are not impacted. But furloughed employees who do not show up for work will affect some functions of the Federal Aviation Administration (FAA).
Social Security checks will also continue to be processed and sent out. Health and Human Services (HHS) will be affected by the shutdown, as about one-third of its employees will be furloughed. Many HHS functions will continue as normal. The Federal Drug Administration (FDA) will also be affected by furloughs, and some functions will be curtailed. Some food safety initiatives will also be affected. The Centers for Disease Control will continue to operate, though less critical functions may stall due to furloughed workers. The Department of Education (DOE) continues working, and student loans and Pell grants continue to be paid. DOE employees who don’t work on student loans are often furloughed. The Supplemental Nutrition Assistance Program (SNAP) will also continue during the shutdown. Funding can become an issue for SNAP if the shutdown lasts long enough.
Disclosure: Past Performance is no guarantee of future performance
