The fourth quarter begins with the Fed having restarted its rate cut cycle in the face of moderating economic activity, with uncertainty around tariffs and trade policy continuing to complicate the outlook. Recent labor market data have weakened meaningfully, with downward revisions to job growth and a modest rise in unemployment signaling softer conditions.
Federal Reserve Chair Jerome Powell announced a 0.25% interest rate cut on September 17, marking the Fed’s first step toward easing policy after a long period of elevated rates. The move reflects growing confidence that inflation is gradually cooling, with the Consumer Price Index up 2.9% over the past year and core inflation trending lower. At the same time, the Fed is mindful of a slowing labor market, with unemployment at 4.3%, and the need to support continued growth. Mortgage rates remain elevated near 6.3%, underscoring ongoing challenges in housing affordability despite a friendlier policy backdrop.
Equity markets have welcomed the shift. Global equities advanced for the quarter, with emerging markets outperforming both U.S. and developed international regions. Within the U.S., growth-oriented sectors led while dividend-oriented and defensive segments lagged. Concentrated mega-cap technology companies remained a key driver, though small and mid-cap equities have begun to show improving earnings growth after a multi-year contraction. Year-to-date, the S&P 500 is up roughly 13%.
Internationally, developed markets advanced in both local and U.S. dollar terms, with dollar weakness amplifying unhedged returns. Emerging markets were the strongest area globally, supported by improving sentiment toward China.
Fixed income markets delivered positive returns as Treasury yields moved modestly lower. Corporate credit fundamentals remain stable, though valuations are stretched, with U.S. investment-grade spreads near their tightest levels in decades. We maintain a neutral duration stance and are overweight securitized credit and select non-U.S. debt markets from a sector standpoint.
We’ve made some adjustments to our model portfolios based on this data – more below.
What History Tells Us About Rate Cuts Near Market Highs
When the Federal Reserve cuts interest rates, the context matters. Investors often assume cuts are only made in response to economic trouble, but history shows several instances where rate reductions happened while the stock market was still hovering near all-time highs. In those cases, the outcomes have varied depending on whether the cuts were pre-emptive to extend growth or reactive to recessionary pressures.
Looking back at the past few decades, the picture is mixed. In 1989 and 1995, rate cuts near highs were followed by strong double-digit gains in the S&P 500 over the following year as the economy avoided recession. In 2001 and 2007, however, cuts occurred just as recessions were setting in—the dot-com bust and the global financial crisis—and the market fell sharply despite easier policy. More recently, in 2019, the Fed trimmed rates while the market was near record levels. Although volatility spiked during the trade war and the early stages of the pandemic, equities ultimately delivered a strong recovery.
The lesson for investors: a rate cut near all-time highs is not automatically a warning sign. The forward path of markets depends less on the cut itself and more on the underlying economic environment. That’s why diversification, discipline, and a long-term plan remain essential—regardless of where interest rates move next.
| Date of First Cut | S&P 500 Near High? | 12-Month Return After Cut | Economic Context |
| Jan-89 | Yes | 22% | Soft landing attempt, economy still strong |
| Jul-95 | Yes | 21% | Pre-emptive cut, no recession followed |
| Jan-01 | Yes | -12% | Dot-com bubble unwinding, recession followed |
| Sep-07 | Yes | -19% | Financial crisis unfolding |
| Jul-19 | Yes | 14% | Trade war + pandemic looming, but strong recovery after initial volatility |
Portfolio Adjustments
From an investment perspective, the Fed’s shift toward rate cuts is constructive for both equities and bonds. Our portfolios remain anchored in U.S. large-cap stocks, benefiting from the market’s year-to-date strength, with a deliberate tilt toward quality growth companies that can sustain earnings as rates move lower. We are moving with the trend and shifting more assets to the mid- and small-cap equities, reflecting the view that these particular segments stand to disproportionately benefit from cheaper short- term financing conditions. Improving earnings growth, attractive valuations and the Fed rate cut cycle are all working to help here.
Internationally, we remain broadly diversified across developed and emerging markets. We recently added the WisdomTree Dynamic International Equity Fund (DDWM) to our equity allocation. The fund provides developed international stock exposure while automatically adjusting how much currency risk we take on. This matters because the U.S. dollar has been unusually strong in recent years, which reduces the value of foreign investments when converted back to dollars. As the Fed begins cutting rates, there is more potential for the dollar to weaken, which would make international returns more attractive. Rather than trying to time these shifts ourselves, DDWM uses a rules-based process to dial hedges up or down, helping us capture more of the upside while reducing currency drag.
Our fixed income holdings are positioned to gain if yields gradually decline in the months ahead. We continue to emphasize diversification — balancing growth exposure with quality bonds and alternative strategies — so that client portfolios can participate in upside while remaining resilient if the economic slowdown proves more persistent. We continue to allocate toward securitized debt like mortgage-backed securities, quality-screened credit, and high-quality corporate debt.
Looking ahead, policy uncertainty tied to tariffs, tax changes, and labor data suggest that the volatility in rates will persist. Our asset allocations will remain focused on high-quality U.S. equities and high-quality credit, with the goal of maximizing our return for the level of risk we take in each portfolio.
We will be making these adjustments this week.
As always, please feel free to reach out with any questions.
Thanks,
Bill
