U.S. stocks reached new record highs in the third quarter, though several other asset classes performed even better – most notably, gold. Interestingly, the shiny metal is offering valuable insights into everything from monetary and fiscal policy to the geopolitical landscape. We’ll explore that further shortly. Beyond gold, a clear theme for 2025 has emerged: diversification is finally paying off, and financial markets continue to demonstrate remarkable resilience.
In last quarter’s commentary, we highlighted the resilience of the stock market in particular. Despite a “tariff tantrum,” elevated valuations, armed conflict between Israel and Iran, and jawing between the White House and the Federal Reserve, stocks continued to power ahead. While several of the headlines changed during the third quarter, one thing remained constant: resilience.
Fed’s Balancing Act
Much of the recent market focus has centered on the economy and the Federal Reserve. After months on hold, the Fed trimmed interest rates by 25 basis points in September and highlighted the difficult balancing act it is facing. As a reminder, the Fed operates under a dual mandate: to promote maximum employment and maintain stable prices. In the second quarter, policymakers emphasized inflation risks, particularly the potential for tariffs to reignite upward pressure on prices. More recently, however, their attention has clearly shifted toward growing concerns in the labor market. The Federal Open Market Committee (FOMC) acknowledged this shift in its September policy statement:
“Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.”
Fed Chair Jerome Powell reinforced this point during the post-meeting press conference:
“In the near term, risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. With downside risks to employment having increased, the balance of risks has shifted. Accordingly, we judged it appropriate at this meeting to take another step toward a more neutral policy stance.”
A slowing labor market is concerning for obvious reasons: layoffs, fewer available jobs, and potential downward pressure on wages all lead to reduced consumer spending which ultimately drives about 70% of the U.S. economy. Lower consumer spending, in turn, puts pressure on corporate earnings – a key concern given historically elevated stock market valuations. As we noted earlier this year:
“Earnings are of utmost importance right now because stock valuations are at elevated levels from a historical perspective, and earnings expectations are quite high. Simply put, companies need the consumer to remain strong in order to grow earnings and justify current valuations.”
The Fed is trying to get ahead of labor market weakness by cutting interest rates. Lower rates affect everything from mortgages and auto loans to credit cards. They also reduce borrowing costs for businesses, making it easier to fund day-to-day operations and invest in long-term projects. In theory, lower rates encourage both consumers and businesses to spend more, which can help support the economy. Increased spending should boost – or at least sustain – corporate earnings, potentially helping to justify current stock valuations.
That said, the Fed still has concerns about inflation. Like us, you probably feel the impact of rising prices every time you go to the grocery store, eat out, or do just about anything. With inflation still elevated, a reacceleration in consumer and business spending could put renewed upward pressure on prices.
Of course, another potential wild card is tariffs. Tariff and trade-war concerns have recently resurfaced, particularly regarding U.S.-China relations. Tariffs are generally considered inflationary: when imposed, they raise the cost of imported goods, and those higher costs are often passed on to consumers in the form of higher prices. This adds another layer of complexity to the Fed’s already tricky balancing act. As Fed Chair Jerome Powell noted:
“Higher tariffs have begun to push up prices in some categories of goods, but their overall effects on economic activity and inflation remain to be seen. A reasonable base case is that the effects on inflation will be relatively short lived—a one-time shift in the price level. But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed.”
The bottom line is that the Fed has its work cut out for it, and investors are closely monitoring the labor market, economic growth, and inflation for signs of what’s next.
Government Shutdown & Gold
Meanwhile, the U.S. government is mired in another shutdown. While these are typically short-lived events, it does highlight the growing debt in the country and the overall negatively trending fiscal health. Adding to the challenge, some key economic data releases are delayed due to the government shutdown – clouding investors’ ability to accurately assess the labor market, economic growth, and inflation.
All of this brings us back to gold. The stellar performance of the shiny metal reflects much of what we’ve discussed above. Falling short-term interest rates typically support gold, as they reduce the opportunity cost of holding a non-yielding asset. Gold also tends to serve as an inflation hedge and a store of value. Concerns about U.S. fiscal health and the strength of the dollar? You guessed it – typically positive for gold. A slowing labor market that could challenge historically elevated stock valuations? Gold is a hedge. While the geopolitical backdrop has cooled somewhat since last quarter, particularly following the Israel-Hamas peace deal, the war between Russia and Ukraine continues. Gold can also act as a geopolitical hedge. The point is, gold is telling investors a story right now – and it’s one we’re paying close attention to.
Looking Ahead
The takeaway from all of this isn’t panic or alarm – it’s recognition that the market environment has become more complex. We continue to ride the wave of stock market resilience, while staying mindful of historically elevated valuations. While valuations are a poor tool for short-term market timing, history suggests that forward returns may be more muted compared to the past several years. In this context, diversification matters more than ever, as seen in the recent outperformance of small-cap U.S. stocks, international equities, and of course gold. Speaking of gold, we’re using this opportunity to strategically rebalance positions that have run ahead, ensuring portfolio risk remains appropriately managed. On the bond side, with interest rates now falling, it could be an opportune moment to lock in still-attractive yields with proper duration exposure. The bottom line is that our playbook remains unchanged: broad diversification, thoughtful asset allocation, and a consistent focus on your personal financial plan.
As always, our advisory team is here to answer any questions you may have!