Economic growth continues amid crosscurrents.
Major economies continue to expand, though interpreting recent data has become increasingly complex. In the U.S., labor demand appears to be moderating while immigration restrictions simultaneously constrain supply. Tariffs are contributing to inflationary pressures, though their impact may prove temporary. Meanwhile, increased defense spending across developed nations provides economic stimulus, though escalation into broader conflicts could reverse these benefits. Adding to near-term uncertainty, a federal government funding impasse that began on October 1st has furloughed non-essential workers, though markets have historically looked through such political disruptions.
Equity markets delivered strong returns.
U.S. stocks posted solid gains, advancing 8.2%1 in the third quarter, and 14.4%1 year to date. International equities slightly trailed domestic equities during the quarter at 6.9%2, but substantially outperformed year to date, rising 26.0%2. This outperformance reflects more attractive valuations in foreign markets and the dollar’s depreciation against major currencies.
Short-term interest rates in the U.S. are starting to fall.
The Federal Reserve continues navigating the challenge of balancing its dual mandate of full employment and price stability. In response, the Fed reduced the overnight Fed Funds rate by 0.25% to 4.1%. Short-term rates have followed suit, with 90-day Treasury Bills yielding 3.9%, down from 4.3% at year-end 2024. U.S. Treasury notes maturing in 10 years are yielding around 4.2%, slightly lower than at the start of the year.
The case for diversification and against market timing.
There have been a few instances when a group of stocks has captured the imagination of investors and led the market higher. But these periods never end well for those who are late to the party. Artificial intelligence may generate huge profits initially, but as the technology matures, the benefits are likely to spread to many industries and businesses. There will be winners and losers, and in an era of rapid technological change, there is no sure way to earn an above-average return. By owning a diversified portfolio of stocks, you will participate in positive returns from the adoption of new technology and avoid catastrophic losses, which might derail your goals. A balanced, diversified portfolio remains the best strategy to build wealth over time.
1Russell 3000 Index; 2MSCI All Country World Index, ex U.S.