A Steady Climb

Quick Take: The Federal Reserve delivered the first interest rate cut of the year, boosting equity and bond markets again in September.[1]

A new month, a fresh milestone in September. Stocks climbed to record highs yet again as investors cheered the prospects of additional interest rate cuts. The rally extended across asset classes and geographies.[2] Large caps, small caps, emerging markets, and international equities all reached all-time highs — an exuberant recovery from the trade-related sell-off earlier this year. [3]

The S&P 500 registered its best September performance since 2010 by gaining roughly 3.5% for the month, while the Nasdaq advanced 5.6%.[4] It was the fifth consecutive monthly advance for the US equity market index, which gained 7.79% for the quarter, the best third-quarter performance since 2020.[5]

Treasuries Extend Gains

Source: https://www.bloomberg.com/news/articles/2025-09-30/treasuries-poised-for-third-quarter-of-gains-as-shutdown-looms

Bonds advanced again as a Bloomberg index of Treasury prices ended September with a positive three-month increase of 1.5%.[6] It has been the best year since 2020 for Treasuries, which are up 5.4% through the first nine months of 2025 with three straight quarters of gains.[7]

The combination of political pressure on the Federal Reserve (Fed) to lower rates, a cooling jobs market, and subdued inflation conspired to drive yields lower (bond prices higher).[8]

The Fed Delivers

On September 17, the Fed reduced its benchmark rate by 25 basis points, setting a new target range of 4.00–4.25%.[9] The widely anticipated quarter-point interest rate cut was the first reduction in nine months, prompted by softening of the labor market.[10]

Fed Chair Jerome Powell called it a risk‑management step.[11] He cited slower job creation and a modest uptick in unemployment as justification, signalling that more cuts could follow if data continues to weaken.[12]

Source: https://www.wsj.com/personal-finance/interest-rate-cuts-mortgages-savings-credit-54bcf65e

The long-awaited move by the Fed, however, does not likely spell significant relief for borrowers in the housing market.[13] Mortgage rates track yields on 10-year Treasury bonds, which are also influenced by the long-term outlook for the economy.[14] The Fed’s rate cut most directly impacts shorter-term interest rates.

In recent weeks, 30-year mortgage rates have drifted lower to 6.26% — as low as they have been for the past year — before edging back up to 6.3%.[15] The Mortgage Bankers Association estimates that mortgage rates could actually increase to 6.5% by the end of the year. Rates may end up staying in the 6% to 7% range, where they have been stuck for the last few years.[16]

A slim majority of Fed officials expect at least two more rate cuts this year, while seven of the 19 officials expect no further cuts, and two project just one more reduction. [17]^,[18]  With “no risk-free path” available, Chair Powell said the committee’s decisions are not “incredibly obvious.”[19]

Highest Earners Dominate US Consumer Spending

Managing the path of interest rates has become harder because the economy is also increasingly difficult to read. The U.S. economy is divided between thriving high earners and younger lower-income workers, moving in different directions.[20] This tale of two Americas also explains how the economy has stayed afloat despite weak hiring, growing debt delinquencies and stubborn inflation.[21]

Source: https://www.bloomberg.com/news/articles/2025-09-16/top-10-of-earners-drive-a-growing-share-of-us-consumer-spending

High earners are spending at a rapid rate, backed by retirement plans, brokerage accounts and homes that have soared in value.[22] Many homeowners locked in long-term mortgage loans at historically low rates. Wealthy consumers in the top 10% of income levels accounted for 49.2% of total spending in Q2, up from 48.5% in Q1, and the highest since this data was first tracked in 1989.[23]

By contrast, low-income workers who saw their wages rise during the pandemic are now cutting back spending, while some are struggling to find work.[24] While unemployment has increased, rents and home prices have surged, making housing harder to afford.[25]

Source: https://www.wsj.com/economy/us-economy-analysis-wealthy-low-income-8ba80ccc?mod=hp_lead_pos3

Recent data has shown this gulf is widening. Although the last few years saw pay for the bottom third of US earners grow faster than the top third, since the start of this year, it is the high earners that have pushed further ahead.[26]

Trade Policy

Trade policy continues to keep investors on their toes, with another round of import tariffs announced including, 100% duties on patented drugs and 25% on heavy-duty trucks.[27] More tariffs were added to lumbar, kitchen cabinets, bathroom furniture and upholstered furniture.[28]

Stocks, however, largely shrugged off the developments in the absence of significant signs of stress.[29] Incoming data still needs to be tracked, but carveouts have helped soften the blow. For example, negotiated agreements with the EU, Japan and the UK will help them avoid the higher rates for pharmaceuticals coming into the U.S.[30]

Meanwhile, the Supreme Court agreed to fast track the administration’s appeal of lower court rulings that its wide-ranging “reciprocal tariffs” are illegal. [31] Arguments will be heard in the first week of November.[32]

Looking Ahead

As September drew to a close, Congress could not agree on a deal to maintain federal funding and keep the government open.[33] Investors will be watching not just for a funding resolution, but for how quickly federal agencies can reopen and resume issuing data. A shutdown that is already stretching well into October could delay key economic reports, complicating the Fed’s October policy decision and denting consumer confidence.[34]

Government shutdowns in the past have not had much of a lasting impact on the economy. Concerns grow if the shutdown continues for an extended period.

Once lawmakers reach an agreement, there will still be a backlog of data to digest before markets can finally refocus on earnings and fundamentals. Earnings reports begin again mid-October, where the market will be watching the impact of tariffs.[35]

Despite policy uncertainty, sticky inflation, and trade tensions, markets have rewarded patience and delivered strong equity returns the first three quarters of 2025. There’s no magic spell for perfect market timing, and as this year reminds us, it’s far more prudent to stick to a thoughtful long-term plan than forecast short-term movements.

As the final quarter of the year has arrived, we wish you a safe and festive Halloween and start to the holiday season. As always, please reach out with any questions or to schedule a time to discuss any changes in life circumstances or financial goals. Now is a good time to set your year-end review – we look forward to connecting and planning for the end of 2025 and for all that awaits us in 2026.

From your friends at JSF