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Dear Friends,
As we move through the third quarter of 2025, markets have remained resilient despite softer labor data and mixed housing indicators. August delivered fresh equity highs and September has been supported by AI driven technology leadership and a widely anticipated Federal Reserve rate cut. While uncertainty persists, the backdrop of moderating inflation, a cooling but still stable labor market, and steady consumer spending continue to underpin risk assets.
Jobs data pointed to further cooling. August payrolls rose modestly, and the unemployment rate edged higher. Recent benchmark revisions trimmed reported job growth over the prior year, which confirms a slower hiring trend and supports the view that policy can continue to normalize without significantly disrupting the expansion.
Inflation remains near but modestly above target. Headline prices rose at a manageable pace over the summer while core measures rose from last year’s peaks. Producer price pressures continued to cool. Together these trends have reinforced expectations that inflation can continue to moderate as growth steadies.
Growth indicators suggest an above trend pace for the quarter. Real-time estimates of third quarter GDP remained solid through mid-September, supported by healthy retail activity and ongoing strength in business investment tied to technology and productivity initiatives. Housing was mixed, with softer starts and permits offset by steady demand in select regions.
The Federal Reserve cut the policy rate by 25 basis points in September and reiterated a data dependent stance. Policymakers signaled that additional easing is possible if labor conditions soften further and inflation continues to move toward target. Rates remain restrictive by historical standards, yet the path has shifted toward gradual normalization as risks become more balanced.
Equities advanced led by mega cap technology and semiconductors with the broad market supported by improving liquidity conditions. Year to date through late September the S&P 500 is up roughly 14 percent on a price basis. International developed markets have also participated with the iShares MSCI EAFE proxy up about 25 percent year to date. Small caps showed a notable upswing this quarter. The Russell 2000 is up about 16 percent over the past three months and roughly 8 to 9 percent year to date, helped by easing rate expectations and improving risk sentiment.
Bonds have provided welcome ballast as yields eased on softer labor and a shift in policy direction. The Bloomberg US Aggregate Bond Index is up about 6 percent year to date, reflecting gains in high quality duration as well as stable credit conditions. Credit spreads remain tight, which points to ongoing risk appetite and solid corporate fundamentals.
We are maintaining diversified, long-term allocations. The combination of slower payroll growth, moderating inflation, and a cautious but easing Fed favors a balanced posture.
As always, if you have questions about how these developments affect your plan or portfolio, we are here to help.
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Sincerely,
The IEM Investment Committee
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