2025 Third Quarter Letter

By David K. MacLeod, CFA, CFP®

Stocks had another great quarter, with the S&P 500 up 8% and small cap stocks up 9%. International stocks built on strong gains in the first half of the year, led by emerging markets up 9% in the quarter. Bond returns were positive as the 10-year U.S. Treasury yield dropped slightly to 4.1% and short-term interest rates declined more in anticipation of further Fed interest rate cuts.

It has been a year of apparent contradictions that have confounded both economists and the average investor alike:

• The U.S. dollar has been weakening while U.S. growth accelerates.

• The Fed is cutting interest rates even as inflation remains persistently above the Fed’s target.

• The federal government continues to run high fiscal deficits, pushing the national debt higher, even though the country isn’t in a recession or at war.

• Consumer sentiment surveys reflect pessimism near 2008 financial crisis levels, even as consumer spending growth is robust and at a record high.

How do we make sense of all this? While history may rhyme, it doesn’t repeat itself exactly in all measures of the financial markets and economy. We live in a dynamic global economy, with numerous factors influencing financial conditions. This often leads to mixed signals, and this is one reason why we don’t rely on short-term predictions in our financial advice.

We believe in reversion to the mean and expect excesses in the markets to return to "normal" over time, even if we don’t know the exact timing. For example, consider the technology stocks that have grown to become a very large percentage of U.S. stock market indexes. We don’t expect the above-average returns and index weights to continue forever. We continue to recommend a disciplined investment process anchored in a financial plan tailored to each client’s goals and risk tolerance.