Introduction to the Market
Autumn has arrived, bringing with it the familiar sights of falling leaves, football, and October baseball. As we shift our focus to the third quarter’s market performance, it’s clear that despite the numerous headlines, from tariff talks to jobs revisions, market volatility remained relatively subdued. For investors looking towards retirement and managing their portfolios, understanding what unfolded and what it means for the future is crucial.
The S&P 500’s Steady Climb
The third quarter saw a further extension of the rebound that began in the second quarter, with the S&P 500 increasing by 8% to just under 6,700, surpassing its February peak. This consistent growth was fueled by Fed rate cuts and strong earnings, leading to five straight positive months. The market’s bullish turn after the second quarter’s topping flirtation has been notable, with the S&P 500 holding well above its 200-day moving average.
However, valuations are flashing caution signs. The S&P’s forward P/E ratio has hit 24x, with an earnings yield of 4.2%, matching the 10-year Treasury yields. The price-to-sales ratio is at its highest on record at 3.3. The Buffett Indicator has climbed to 217%, surpassing the peaks seen during the dot-com bubble and before the 1929 crash, and is two standard deviations above the long-term trendline. These high valuations suggest that long-term returns may be leaner, although they are not reliable for making short-term predictions.
Global Markets Hold Strong
International stocks continued their uptrend, with the MSCI All World Ex-U.S. index up 5% in the third quarter. Emerging markets finished stronger, outperforming developed international markets and the U.S. The dollar steadied after its big first-half drop, resulting in its worst year since 1973. International markets were led by China, Japan, Mexico, and Spain, while India and Germany lagged.
Ex-U.S. stocks are trading at 17x, and emerging markets at 14x, compared to the S&P 500’s 24x. Global central banks have cut interest rates 168 times over the past 12 months, which is the third-highest reading this century, supporting the markets.
Bonds Steady Amid Yield Pressure
Bonds edged slightly positive in the third quarter, with the 10-year Treasury yield at 4.1% after the second quarter’s spike. The 30-year yield dipped to 4.7% post-September’s Fed cut, though inflation concerns lifted long-end yields. Annualized interest payments topped $1.1 trillion, fueling deficit debates. The average 30-year mortgage rate is currently about 6.4%, as housing remains historically unaffordable.
Gold’s Momentum Continues
Gold climbed to over $3,850 per ounce, having its best September in 14 years and its best overall year since 1979. Gold miners are scorching hot, with the GDX up 116% YTD. Silver is approaching $50 per ounce, its highest since 2011, poised for a historic breakout. Platinum and palladium followed strongly. Dollar weakness, central bank buying, geopolitics, and fiscal concerns have all contributed to gold’s strength.
Morgan Stanley now favors a 20% gold allocation as a more resilient inflation hedge, given that U.S. equities are offering historically low upside over Treasuries. DoubleLine Capital CEO Jeffrey Gundlach believes holding a 25% gold position "isn’t excessive." Gold is now the second-largest reserve asset, behind the U.S. dollar.
Crypto’s Mixed Bag
Cryptocurrencies held strong in the third quarter, with bitcoin above $110,000. Bitcoin now makes up 58% of the overall crypto market, valued at $3.9 trillion. Altcoins like ethereum, XRP, and Solana outperformed bitcoin on momentum trades. Regulatory uncertainty looms over the sector.
Jobs Under Pressure
Job growth slowed in the third quarter, with the Bureau of Labor Statistics’ September revision from 2024-early 2025 being the largest since 2000, slashing monthly averages to 70,000. The impact of AI grew, with Walmart CEO Doug McMillon noting that AI is "literally going to change every job." Hiring froze, per the Federal Reserve’s Beige Book, with the Fed eyeing cuts to spur hiring, risking inflation.
Fed Chair Jerome Powell noted that near-term risks to inflation are tilted to the upside, and risks to employment to the downside, a challenging situation. It’s essential to bolster emergency funds and increase retirement contributions in preparation for AI-driven disruptions.
What Else Can You Do?
To navigate these market conditions, consider the following actionable steps:
- Optimize IRAs and 401(k)s with tax-advantaged funding and dollar-cost averaging.
- Diversify globally, as U.S. valuations urge caution. Explore ex-U.S. or emerging market equities and bonds.
- Consider precious metals, as gold is soaring. Silver or miners may offer value on pullbacks.
- Add bonds, as short-term bonds could hedge rising risks.
- Stay nimble, as volatility could increase due to various factors, including government shutdown, global tensions, Q3 earnings, tariffs, Fed moves, and legislative actions.
Conclusion
As we move forward, it’s crucial to stay informed and adapt to the changing market landscape. By understanding the trends and taking proactive steps, investors can better position themselves for success. Remember, markets are constantly evolving, and staying nimble is key to navigating these changes effectively.
