The 3^rd quarter of the year is typically a volatile and negative period for the US stock market.  It certainly started that way, but September ended as possibly the best performing month of 2025.  Nasdaq, S&P and Dow all hit new highs. The market worked through uncertainty surrounding tariffs, trade tensions, regional conflicts, and interest rates.  The Federal Reserve was forced to redirect focus from imagined tariff induced inflation to the reality of big losses in the US job market.  At the September meeting the Fed reduced the federal funds overnight rate from 4.25% to 4%. The Fed is expected to continue reducing rates at the October and December meetings.

Unless there is an event, we should be able to see the market continue to push up through the end of the year.  There is the beginning of concern that the earnings of AI companies are not being accurately reported. Issues are also developing in the shadow banking industry.  Shadow banks are non-depository financial operators who exist to lend money to borrowers with credit issues.  The shadow banks are funded in part by cash borrowed from regulated banks.  The lack of regulation of shadow banks could leave the regulated banks holding the bag. The recent bankruptcy of a shadow bank in Texas revealed how big a problem this could become.

The monthly employment numbers reported by the Bureau of Labor Statistics (BLS) have been less than accurate.  But those numbers are the basis for the Fed’s decision to hold interest rates at a high, restrictive rate.  The latest numbers from the BLS show that there has not been a net new full-time job created in the US since April.  Part-time hires now outnumber full-time hires.  The annual revision for job creation from April 2024 to March 2025 showed new job creation had been overcounted by 911,000.  The BLS reported a loss of jobs in June and revised down previous numbers for the year.  The latest employment number comes from the private company ADP, which showed a loss of 32,000 private-sector jobs in September. 

The government shutdown has delayed the BLS job number for September.  But we do know that 150,000 government workers went on unemployment on October 1^st.  Keep in mind that job losses come after an economy is already in recession. 

While Nasdaq, S&P and Dow are hitting record highs, the Magnificent 7 stocks remain the primary driver of that performance.  The top 10 performing stocks generated approximately 70% of the 3^rd quarter S&P performance.  Leaving 490 stocks with low to negative returns.  AI/tech companies are the foundation for the market’s new record highs.

The 2^nd quarter GDP number was revised upward to 3.8%.  The higher-than-normal imports prior to the announcement of tariffs in April were followed by a higher-than-normal exports for the remainder of the quarter. The fluctuations in the import/export numbers caused the distortion of the GDP. The leading economic indicator index indicates a continued weakening of the economy.

Expect job losses to continue through the 4^th quarter.  The number of available job openings continues to drop.  Recent college graduates are finding it difficult to find a job with unemployment for that group running around 10%.  The overall unemployment rate is 4.3%.  That number does not include discouraged workers who’ve simply given up looking for a job. If that group was included in the number, the unemployment or underutilization rate would be 8.1% as of the August reading.

The Federal Reserve has set 2% as the goal for inflation in the US economy.  The most recent reading showed inflation at 2.9%.  The greatest impact on that number was shelter cost.  The BLS continues to use owner equivalent rent and outdated rental rates to determine the shelter cost inflation impact.  BLS shows shelter cost at 3.6% which is grossly incorrect.  Rental rate inflation is near zero while residential homes are beginning to lose value.  Areas of the country are being impacted differently.  Some areas are seeing big drops in home selling prices.  Across the country sellers outnumber buyers.  Recent drops in mortgage rates have brought out some buyers but buying activity is forcing would be sellers to drop their asking price.  National home builders are giving negative forward guidance.  A loan modification program used by the FHA to keep distressed homeowners in their homes ended October 1^st.  Expect the number of foreclosures to continue ticking up.

The Fed’s move to drop interest rates will have a positive impact on consumers with variable rate loans.  But the true impact of a rate cut or increase typically takes 12-16 months to work through the economy.  The Fed has indicated a desire to keep rates as high as possible for as long as possible. However, the next rate cutting cycle is now in place.  The first global central bank to cut rates was Switzerland.  The rate there is now zero and short-term treasury yields are negative.  The US will push in that direction.

The global recession continues with no sign of any regional economic strength.  Europe is in the 2^nd year of recession.  The French and German economies are weakening further.  Italy and Poland are the 2 bright sports in Europe.  China is in the 3^rd year of a deflationary cycle and the Chinese government continues to dig the hole deeper.  The Chinese have lost the push for a consumer driven economy.  The number one store of wealth in China is real estate, and home values continue to decline.  Consumers are refusing to spend money.  The government continues to push manufacturing to overproduce.  The result, deflation is being exported to the world.

The biggest change to the Oak Springs portfolio has been the addition of SHY.  This is an ETF which holds 1-3 year treasury bonds.  It pays monthly dividends, currently at a 3.9% annual rate.  This is a holding spot for cash. As the Fed continues to reduce rates we will see an appreciation in the SHY value.

If you have any questions, please feel free to contact me at (865) 368-1917. Your trust is greatly appreciated.