Key Points:
• The Federal Reserve cut their policy rate 25 basis points in a widely expected move
• Stocks again pushed to all-time highs during the month with the S&P500 up 14.8% for the year.
• Bonds and international stocks continue to have a strong year, rewarding globally diversified and balanced investors.
The Federal Reserve resumed its rate cutting cycle in September, dropping the Federal Funds rate 0.25% to a range of 4%-4.25%. This was the first cut in the policy rate since December of 2024. Weakness in the labor market trumped higher than target inflation. Additional 25 basis point cuts are expected at the next several meetings to stimulate investment and job growth. Fed Chairman Jerome Powell indicated that the committee was still concerned about how tariffs may impact inflation and the economy, but the move towards a more neutral policy rate of around 3% would be gradual and measured.
Stocks moved significantly higher during the month, led by the tech-heavy NASDAQ which gained 5.7%. The S&P500 was up 3.7% while the Dow Jones Industrial Average advanced 2%. Growth stocks outperformed value as the best sector of the market was technology, gaining 7.3% in September. Communication services (+5.6%) and utilities (+4.2%) also saw strong moves higher while materials (-2%), consumer stables (-1.6%) and energy (-.4%) saw negative returns. Small caps have seen renewed interest by investors with the Fed easing on rates. The Russell 2000 Index is now up 10.4% for the year, but a slowing economy may weigh on the asset class.
As the US equity market may be in the midst of its third consecutive year of strong returns, 2025 has been the year for international equity investments. For US investors, developed international and emerging markets are up over 25%. The US Dollar has depreciated against other major currencies and relative values of international stocks have drawn global demand.
Bonds had a strong September as US Treasury rates across the curve moved lower on expected lower short term rates. The Bloomberg US Aggregate Bond Index gained 1.1% for the month and is up over 6% for the year. A looming government shutdown may cause critical economic data to be unavailable or delayed, but the US markets have shrugged off volatile policy and uncertainty this year.
Sources: Morningstar Direct, Merrill Lynch, Wall Street Journal, Franklin Templeton, Guggenheim Investments