As the fourth quarter began, the US federal government largely closed, owing to Congress’s failure to pass the appropriations measures necessary to keep it open. The resulting uncertainty dominated news reports for the six weeks of the shutdown, but it seemed to have little effect on the US stock market, which rose persistently, if not strongly. The market reached a peak in mid-November, just about the time the government re-opened. With that event behind them, market participants went back to wondering about general political uncertainty, tariffs, and the future independence of the Federal Reserve, adding a new concern about the reliability of the measures of economic activity that various federal agencies publish. Against this backdrop, the Federal Open Market Committee lowered its benchmark short-term interest rate on December 10 but signaled that the future course of rates has become murky. The market’s advance stalled, and US market indices ended the year near their mid-November levels. For the full quarter, the S&P 500 index returned +2.66%. The Mid-cap 400 index returned +1.64% for the quarter, and the Small-cap 600 index returned +1.70%. [Index returns: Standard and Poors]
Overseas stocks continued to outpace US issues. The MSCI EAFE international equity index returned +6.13% in local currencies. The US dollar dipped mid-quarter against European currencies, but ended the period little changed: $1.1736 against the euro and $1.3447 against the pound Sterling at December 31, levels nearly identical to the September 30 figures of $1.1735 and $1.3443. Policy changes in Japan led to a significant weakening of the yen; at December 31 a dollar bought 156.80 yen, compared to 147.97 at the end of September. Overall, the movements again trimmed US dollar returns on foreign assets, and EAFE returned +4.86% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
As noted, the Federal Reserve made another quarter-point reduction in its short-term policy rate, seemingly in line with market expectations. Short-term yields fell accordingly, with the yield on the two-year US Treasury note ending the quarter at 3.47%, down from 3.60% at the end of September. Concerns about the possibility of continued inflation persist, however, and longer rates remained little changed. The ten-year yield ended the quarter at 4.18%. At September 30 the ten-year yield was 4.16%. The Bloomberg Barclays US Aggregate Bond index returned +1.10% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]
The US stock market maintained an eerie serenity for the entire third quarter, despite a litany of potentially unsettling developments in the political and economic arenas. Nothing seemed to interrupt the market’s gradual, but steady, climb. Not continued uncertainty over tariffs. Not the White House’s attempt to remove a governor of the Federal Reserve on feeble grounds, raising questions about longer-term prospects for the central bank’s independence. Not the actual removal of the head of the Bureau of Labor Statistics in response to a weak jobs report. Not stubborn inflation and weak growth in employment. Not prospects for a government shutdown, which took place as the quarter ended. To explain the market’s strength, observers pointed to large corporate investments in efforts to develop artificial intelligence, the high level of fiscal stimulus (too high for an expanding economy) in the recently passed budget reconciliation measure, and a modest monetary easing by the Fed. The US equity market again ended the quarter at all-time highs – for the full quarter, the S&P 500 index returned +8.12%. The Mid-cap 400 index returned +4.44% for the quarter, and the Small-cap 600 index returned +9.11%. [Index returns: Standard and Poors]
Overseas markets also advanced. The MSCI EAFE international equity index returned +5.38% in local currencies. After falling sharply for several months, the US dollar found its footing. It rose to 147.9 yen, from 144.17 at the end of June. Its moves relative to European currencies were similarly modest. The dollar firmed to $1.344 against the pound Sterling, compared to its June 30 level of $1.372. It closed the quarter at $1.174 against the euro, not far from its level of $1.177 at the end of June. Overall, the movements trimmed US dollar returns on foreign assets, and EAFE returned +4.77% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
The Federal Reserve reduced its short-term policy rate by a quarter point, seemingly in line with market expectations. Yields fell modestly across maturities. The yield on the two-year US Treasury note ended the quarter at 3.60%, down from 3.72% at the end of June. The ten-year yield ended the quarter at 4.16%, down a bit from its June 30 level of 4.24%. The Bloomberg Barclays US Aggregate Bond index returned +2.03% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]
A weak market gave way to panic in the week following “Liberation Day,” the White House Rose Garden announcement of what the Administration styled “reciprocal tariffs” against imports from around the world. It rebounded after the announcement of a “pause” for officials to negotiate “90 [trade] deals in 90 days.” Market participants seemed to discount the claimed pace of dealmaking as bluster, and the stock market recovered steadily despite growing uncertainty about how the tariff regime might actually develop. Not even US bombing of sites in Iran believed to be connected to that nation’s program to develop nuclear weapons produced more than a ripple. Nor did the White House’s taunting of Fed Chair Jay Powell. Markets did seem to react favorably, if modestly, to prospects for Congressional passage of a large budget package; critics argue that the bill benefits monied interests at the expense of lower-income families and the soundness of the nation’s credit. The US equity market ended the quarter at all-time highs, just eclipsing a peak that occurred in February. For the full quarter, the S&P 500 index returned +10.94%. Smaller stocks gained more modestly; the Mid-cap 400 index returned +6.70% for the quarter, and the Small-cap 600 index returned +4.90%. [Index returns: Standard and Poors]
Overseas markets also advanced. The MSCI EAFE international equity index returned +4.80% in local currencies, while uncertainty over the nature and effects of tariffs knocked the props from under the US dollar. It fell to 144.52 yen, from 149.9 at the end of March. Its moves relative to European currencies were more dramatic still. The dollar weakened to $1.1727 against the euro and $1.372 against the pound Sterling, compared to March 31 levels $1.0796 and $1.2896, respectively. Such a move increases the dollar prices of most foreign assets, so EAFE returned +11.78% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
The Federal Reserve made no changes to interest rates, a prudent policy so long as economic indicators remain reasonably firm and uncertainty persists concerning whether a coherent trade policy will ever emerge. Short term market rates eased — the yield on the two-year US Treasury note ended the quarter at 3.72%, down from 3.89% at the end of March. The ten-year yield ended the quarter at 4.24%, little changed from its March 31 level of 4.23%. The Bloomberg Barclays US Aggregate Bond index returned +1.21% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]
The stock market began the new year with a modest bounce, which carried the S&P 500 index back to its December highs just after inauguration day. A few weeks of volatility followed, with the index reaching its closing high on February 19. From then on, the uncertainty surrounding the Administration’s erratic approach to tariffs and the disruptions at various government agencies overshadowed optimism, more broadly expressed than held, over possible “pro-growth” government policies. The market fell sharply until mid-March, after which it bounced, only to fall back as the month ended. For the full quarter, the S&P 500 index returned –4.27%. Smaller stocks fell further; the Mid-cap 400 index returned –6.10% for the quarter, and the Small-cap 600 index returned –8.93%. [Index returns: Standard and Poors]
Overseas markets were generally stronger. The MSCI EAFE international equity index returned +2.89% in local currencies. The US dollar fell back from its earlier peaks, reflecting the overall uncertainty concerning the shape of US economic policy. It fell to 149.62 yen, from 157.37 at the end of December. It weakened to $1.0804 against the euro and $1.2938 against the pound Sterling, compared to December 31 levels $1.0351 and $1.2521, respectively. Such a move increases the dollar prices of most foreign assets, so EAFE returned +6.86% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
Interest rates generally fell, as market participants adjusted their expectations for economic growth downward. The yield on the two-year US Treasury note ended the quarter at 3.89%, down from 4.25% at the end of December. The ten-year yield fell to 4.17% from its December 31 level of 4.58%. The Bloomberg Barclays US Aggregate Bond index returned +2.78% for the quarter. [Index returns: Bloomberg; bond yields: US Treasury]