Q3 2025 Investment Commentary

Whew! The U.S. equity markets kept testing new highs through the month of September—the month which
has seen some of the biggest market downturns in our economic history. The price/earnings ratio (currently
above 27) for the S&P 500 is higher than it was right before the 1987 and 2000 stock market crashes.
Reaching these highs in the tricky month of September might have been a recipe for a significant market
event—which can generate panic selling at the bottom and the regretful sabotage of sound retirement
portfolios.

A breakdown shows that just about every U.S. investment category experienced moderate to robust quarterly
gains. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—gained 8.24% in the third
quarter of the year and now stands at a positive 14.45% for the year. The comparable Russell 3000 index is
now up 14.40% for the year.

Looking at large cap stocks, the Wilshire U.S. 2500 Large Cap index gained 8.14% in the recent quarter and is
now up 14.49% for the year. The Russell 1000 large-cap index is up 14.60% since the end of December, while
the widely quoted S&P 500 index of large company stocks gained 7.79% in the third quarter, to bring investors
a 13.72% gain for the year so far.

The Russell Midcap Index was up strongly for the second quarter in a row, standing at a 10.42% gain through
the end of September.

As measured by the Russell 2000 Small-Cap Index, investors in smaller companies are sitting on a 10.39% gain
for the year after a big third quarter rally. The technology-heavy Nasdaq Composite Index gained 11.24% in
the third quarter and is now up 17.46% for the first three quarters of 2025.
Foreign markets are still outpacing the U.S. equity scene. The broad-based EAFE index of companies in
developed foreign economies gained 4.80%, in dollar terms, in the third quarter of 2025, now delivering a
robust 25.70% return for the first half of the year. Emerging market stocks of less developed countries, as
represented by the EAFE EM index, gained 10.90% in dollar terms in the recent quarter, posting a 26.60% gain
for the first three quarters of 2025.

Real estate securities have recovered their losses. The Wilshire U.S. REIT index gained 4.73% in the recent
quarter, taking its return up 4.47%. Commodities returns are up slightly: the S&P GSCI index posted a 1.26%
return in the 3rd quarter and is sitting on a narrow 0.06% positive return for the year. Utility stocks, as
measured by the S&P 500 Utilities index, rewarded investors with a 6.84% gain in the third quarter, leading to
an 15.13% gain for the year so far.

In the bond markets, the yield inversion continues. Treasuries of 3-month (3.92%) and 6-month (3.82%)
duration are yielding more than government securities with 1-year (3.57%) and 5-year (3.74%) durations. 30-
year government bonds are holding steady at 4.75%; 10-year maturities are yielding 4.25%. Five-year
municipal bonds are yielding 2.31% in aggregate, while 30-year municipal bonds are yielding 4.30%.
The economic and corporate news continues to be positive heading into the final three months of the year.
Both the Nasdaq and the S&P 500 indices posted their best September returns in 15 years, gaining 5.6% and
3.5% respectively. The large cap companies that make up the S&P 500 are projected to see 7.9% year-overyear
earnings growth in the third quarter, which, if it holds up, will mark the ninth consecutive quarter of
growth.

Economists, who seem to be paid to worry and raise alarm bells, have noted that the inflation rate has been
stubbornly above the Federal Reserve’s 2% target (currently 2.92%, up from 2.7%), and nearly a million fewer
jobs were created in the U.S. in the most recent 12 months than in the prior time period—a sign that the
unemployment rate could be ticking up with the next report. The on-again, off-again tariffs create additional
uncertainty, although most economists now seem to think they will generate only a temporary rise in
consumer prices.

Meanwhile, the recent 0.25% rate cut by the Fed was designed to give the economy a mild boost, and many
economists are expecting a second cut between now and the end of the year. We won’t get the next
quarterly GDP report until October 30, covering the third quarter, but the 3.8% GDP increase in the second
quarter is encouraging.

By far the biggest unknown is when Congress will end its stalemate and the government will be back in
business from the current shutdown. A prolonged shutdown would allow the President to fire tens of
thousands of government workers—something the Democratic representatives are unlikely to favor. Both
sides are playing politics now, hoping the American voters will put the blame on the opposite side of the aisle.
Even so, a brief shutdown might not be tremendously damaging to the American economy. Air traffic
controllers and Transportation Security Administration employees are considered essential workers and would
keep the airports running. The postal service wouldn’t shut down. There would be delays in Social Security
and VA services, but otherwise the biggest impact would be felt by federal workers and active-duty military
service members who would not receive a paycheck during a government shutdown—and then have their lost
wages made up when the stalemate ends. The longest-lasting shutdown, from late 2018 into the following
January, lasted just 35 days, and by all accounts had minimal lasting economic impact.

In other words, the data is a confusing jumble of signals that tell us very little about the future, and
particularly the future of the investment markets. We know that a downturn is somewhere in our future, and
that someday the economy will experience another recession.

And we also know that, based on the historic growth of the economy and the companies that make it up,
these things don’t really matter much in the long term.

Your Partners in Financial Planning Team

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