Weekly Newsletter: October 6, 2025
“I don’t know what they have to say, it makes no difference anyway. Whatever it is, I’m against it.” Whether Congress, the Fed, or discussions in general, Groucho had it pegged 95 years ago. The government shutdown looks to be lasting for a while as each side digs its heels in deep. Compromise is not a word that gets tossed around much anymore. As a result, various economic reports, including the “big” employment report, have also been postponed. In an effort to grab onto something, secondary and tertiary reports are used to assess the health of the economy. In the absence of data, stories are being made up to fit a narrative that may bear little resemblance to the truth, whatever that may be. The financial markets are going their own way, no matter what may (or may not) be happening. It is assumed that the Fed will cut rates later this month and maybe again in December. Lower rates are a good thing for the markets, unless it is because the economy is truly struggling. Even if it is struggling, the tech sector will come to the rescue and keep the indices afloat. The political theater will soon give way to earnings season later this week, and just maybe investors can agree on the health of Corporate America.
Without a key piece of the economic puzzle, investors are left guessing what the Fed will do later this month with interest rates. Based on the latest report from the Mercantile Exchange, investors believe there is a 99% chance the Fed cuts rates. This is based on weak employment data from ADP, which generally gets the direction of change correct, but tends to be off in magnitude. Clouding the information further, ADP usually goes through its own revisions in September, making the numbers a bit better than the headlines might suggest. To be sure, much of the anecdotal evidence suggests that there has been an overall slowing in hiring as well as firing over the past few months, resulting in a stagnant labor market. Further complicating analysis is that the ADP data goes back to 2010. Except for the Covid period, the economy has generally been growing, so it is hard to judge the overall accuracy of the data at economic turning points. The financial markets are betting on good overall earnings to support higher stock prices. Earnings season will kick off in earnest on the 14th with the banking sector. The health of the consumer and potentially the labor market may be inferred from those reports during the last half of the month. Without help from “official” government data, investors will be left to create their own narrative around the information they see.
The bond market has performed very well so far this year. Yields are slightly lower than the start of the year, and investors have been able to collect interest payments well above what had been the case for the past fifteen years. The Fed will be balancing its policy between perceived weakness in the jobs market and persistently higher inflation data. Tariffs are expected to boost prices and be a “one-time” impact. The consistent flow of tariff announcements has not abated. While much of the increases have not been passed to the consumer, corporate commentary following earnings reports could shed light on how companies will deal with ongoing and any future tariff hikes.
Government shutdowns generally have had little impact on stock prices. Over the past 20 times the government has shut down since 1976, they tend to get resolved within a week or two. However, two of the last four have lasted for more than three weeks. Once resolved, whatever loss to economic growth occurred tended to be made up rather quickly, hence the market’s ambivalence. The steady move higher by stocks, bolstered by the continued excitement around AI, should not be a surprise. It will take an economic event to push stocks into a prolonged decline, not a political or military event. So far, little in the way of economic calamities is seen on the horizon. That said, technology stocks do hold the key to further gains as their weight and earnings growth have been the main drivers for higher stock prices. The third quarter is a fair representation of the year so far. Non-capital weighted indices are up about half of the capital weighted indices. Either smaller stocks catch up over time, or the large stocks “catch down” to the average stock over time. Again, earnings season should help clear up which is more likely.
Without the usual deluge of economic data, Fed chatter and a sprinkling of earnings data will garner investors’ attention this week. It may be another week of very modest advances and/or declines.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.