OCTOBER 2025 MARKET INSIGHTS

By: DOUGLAS A. RILEY, CFA, PORTFOLIO MANAGER

As expected, the Federal Reserve cut interest rates by 25 basis points at the September meeting. Conveniently, the annual Employment Revisions Report, released a few days before the meeting, showed a substantial reduction (-911k) in non-farm payrolls for the 12 months ending March 2025, effectively wiping out all job gains reported in 2024 and, coupled with weak reported job growth in July and August, provided plenty of cover for the cut¹. The “Dot Plot,” a series of forecasts showing each Board member’s expectations for the Fed Funds rate in the future, suggests potentially two more cuts by the end of the year. As I write, the Chicago Mercantile Exchange’s Fed Watch tool shows a 98.9% probability of another 25-basis point rate cut at the October 29th Fed meeting².

President Trump and Treasury Secretary Bessent want lower short-term interest rates to reduce the government’s interest burden. They appear to be much less concerned about inflation risks if the economy runs “hot.” To that end Trump appointed, and the senate confirmed just prior to the September meeting, uber-dove Stephen Miran, the (now former) Chairman of the Council of Economic Advisors, to fill a vacant Federal Reserve Board seat. Unsurprisingly, his forecasts were some of the lowest of the Fed governors.

Bonds traded well in anticipation of the cut with the 10-year Treasury yield falling to 4.03% prior to the meeting before rising again to finish the month at 4.15%, down 8 bps on the month³. The Bloomberg Aggregate Catholic Values (CV) Index returned 1.07% in September, edging out the 0.85% return on the US Treasury Index3. Through the first nine months of the year, the Aggregate CV Bond Index produced a total return of 6.11%³. Credit spreads narrowed further to 0.28%, the tightest since 1997, giving no indication of financial stress³. Data reported in the two weeks following the September Fed meeting suggests the economy is on solid ground.

Second quarter GDP growth was revised sharply higher, to a 3.8% annual rate, driven by much stronger spending than previously reported³. Personal income and spending for August both exceeded forecasts, and August Core Retail Sales rose 0.7% from July, well above expectations and the fastest YoY pace since February of 2023³. August Core CPI and Core PCE rose 3.1% and 2.9%, respectively, YoY³. Both series have been trending up since March, a reminder that inflation is not dead and buried. None of the above, not to mention equity indices at all-time highs, points to the need for lower interest rates.

Bucking the historical record, stocks climbed steadily in September with multiple equity indexes hitting new all-time highs globally. Also at all-time highs is market concentration in the S&P 500 Index. Just 10 stocks constitute roughly 40% of the benchmark’s total market capitalization compared to about 27% at the height of the “dotcom” bubble in 2000⁴. The Bloomberg 1000 Catholic Values (CV) Index gained 4.04% in September³. Highlighting the narrowness of the market, 93% of the return was driven by 15 Technology/AI related names³. That pushed the year-to-date total return for the 1000 CV Index to 16.45%³. That still trails the 26.33% year-to-date total return for the World ex-US CV Index (up 3.88% in September)³. The 1000 CV Growth Index gained 5.00% in September and is up 18.01% year-to-date³. Laggards for both the month and year-to-date, the Bloomberg 2000 CV Index and the 1000 CV Value Index advanced 1.91% and 1.09%, respectively, in September with the 1000 CV Value Index up 11.82% year-to-date³. Only the Small Cap 2000 CV Index, up 7.18% YTD, hasn’t hit double-digits on the year³.

So, why are we in a rate cutting cycle? First, as mentioned previously, the administration wants to lower the interest expense (currently tracking at more than $1.2 trillion for fiscal 2025) on federal debt⁵. Federal Reserve Board governors understand this and, despite the insistence of some claiming the contrary, the Fed is political⁶. Secondly, the Producer Price Index (PPI) fell -12 basis points in August (after a hot July post), driven largely by Trade Services and Warehousing, which may be confounded by tariff impacts³. But the PPI has generally been trending lower since January. Perhaps most importantly, from the Fed’s perspective, the housing market remains weak. Though declining mortgage rates fueled an August jump in home purchases (+20% versus July) to 800k annualized, which was well above expectations, Permits fell, and new single family home sales have been at or below pre-Covid levels for the better part of four years while existing home sales have been similarly stagnant due to owners being trapped in mortgage prison³.

Housing is one of the most rate sensitive segments of the economy and has a broad impact, direct and indirect, on employment. As the Fed attempts to thread the needle between employment and inflation, it appears that employment has moved to the forefront in terms of risk. While initial unemployment claims have hardly spiked and remain on par with the past few years, unemployment (currently 4.3%) has quietly crept higher from 4.0% at the start of the year and 3.7% at the start of 2024³. With inflation running around 3% annualized and Fed Funds over 4% there is widespread belief that a real interest rate greater than 1% provides leeway for accommodation4.

Equity markets breezed through September with nary a hiccup. Not even the threat of a government shutdown (now official) could ruffle investors’ feathers. It is possible that third quarter earnings could put a scare into buyers, particularly if margin pressures emerge, but nothing so far has been able to derail the AI freight train. With more cuts on the way during a seasonally favorable period we expect institutional FOMU (Fear of Major Underperformance) to increasingly come into play as we approach year end.

[1] Source: National Current Employment Statistics March 2025 Preliminary Benchmark Revisions by Major Industry Sector https://www.bls.gov/news.release/prebmk.t01.htm
[2] Source: Chicago Mercantile Exchange Fed Watch Tool https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
[3] Source: Bloomberg
[4] https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/economic-and-market-update/
[5] Source: Monthly Treasury Sheet https://fiscaldata.treasury.gov/datasets/monthly-treasury-statement/summary-of-receipts-outlays-and-the-deficit-surplus-of-the-u-s-government
[6] https://cdn.mises.org/files/2025-08/July%20August%202025%20Misesian.pdf