- On October 1st, the U.S. government shut down after bipartisan funding bills failed in the Senate, leading to nearly one million federal employees being furloughed. With negotiations stalled and little guidance on a timeline for a resolution, the shutdown is now the longest on record, though historically such events have not had lasting effects on economic growth.
- The shutdown halted key economic data releases, including jobless claims and payroll reports, leaving the Fed and market participants with an incomplete picture of the U.S. economy. Despite having limited data, the Fed cut its benchmark rate by 0.25% to 3.75%–4.00% after its October meeting, citing a cooling labor market and moderating inflation.
- Looking ahead, Fed Chair Powell emphasized that, despite market expectations, an additional rate cut in 2025 is not guaranteed, and, if limited data does not allow them to get a complete picture of the health of the economy, a more cautious approach for the remainder of the year may be appropriate.
- The U.S. dollar rebounded 1.7% in October, partially driven by the Fed’s hawkish comments, while other major currencies like the euro, pound, and yen lagged. Despite the rally, the dollar remains down ~7% year-to-date after a challenging first half marked by fluid tariff policies and global volatility.
- According to the latest Atlanta Fed GDPNow estimate, real U.S. GDP growth for Q3 is tracking at 4.0%, but Q4 growth is expected to slow due to the shutdown, fading consumer spending, and lagged tariff effects. AI-related capital expenditures and wealth effects remain key drivers of growth, but risks are skewed to the downside if market sentiment shifts.
- During a late-October meeting, President Trump and Chinese President Xi agreed that China would pause sweeping controls on rare-earth materials and resume agricultural purchases in exchange for reduced tariffs, adding some near-term stability to relations between the world’s two largest economies, though key issues like access to semiconductors and other technology remain unresolved and could lead to future tension.
- Despite narrowing market breadth, U.S. equities reached new record highs in October as the S&P 500 gained 2.3% and the Nasdaq advanced 4.7%, both led by the “Magnificent Seven” and other large-cap growth stocks. International Equities continue to outperform their U.S. counterparts year-to-date, with both emerging (4.2%) and developed (1.2%) markets posting strong results.
- In fixed income, Treasury yields dipped mid-month but then rebounded, with the 10-year ending October at 4.11%, while credit spreads remained mostly stable and municipal bonds underperformed due to increased supply and fiscal uncertainties.
- Despite headlines over the last few weeks suggesting otherwise, the private credit market remains broadly stable as a couple of recent bankruptcy filings are being seen as idiosyncratic events tied to fraud and not reflective of the overall health of the asset class. Declining base rates should offer some relief to floating rate borrowers, but will also impact lenders’ earnings, so distribution yields are likely to decline in 2026.
- With uncertainty likely to remain elevated until the government shutdown ends and potentially beyond, investors should focus on proper diversification and ensure their portfolios are in line with their level of risk tolerance and long-term financial goals.
