Continued Market Growth

The stock market continued its strong performance in October despite uncertainty from a government shutdown and renewed trade tensions with China early in the month. Many major indices reached new all-time highs after recovering from a brief period of volatility. Bonds also contributed positively to portfolios as interest rates declined, fueled partly by the Federal Reserve’s second consecutive rate cut.

Despite positive gains, the month was not without challenges. The ongoing government shutdown captured headlines and raised recession concerns, while a brief “tariff tantrum” over rare earth metals caused the largest single-day market decline since April. However, markets quickly recovered, reinforcing the importance of not overreacting to headlines. These market dynamics also pushed gold to a new all-time high, before pulling back toward the end of the month.

The Markets were unfazed by the government shutdown

October began with the government shutdown, which is now approaching the longest on record. Many agencies, including those that provide timely economic reports, have been operating at minimal levels since then.

While the shutdown creates hardships for many federal workers and their families, shutdowns have historically not had lasting effects on financial markets since government spending is typically postponed, rather than lost entirely.

There are also concerns around government layoffs, known as reductions in force. From the perspective of the broader economy, federal government employment represents only 1.8% of the total workforce, and recent reduction-in-force notices amount to just 0.002% of total U.S. employment. While the shutdown creates real difficulties for affected workers and interrupts government services, its overall economic impact remains limited.

Trade tensions created brief volatility

The market also experienced its sharpest one-day decline since April, driven by escalating tensions between the U.S. and China over rare earth metals, and the threat of 100% tariffs on Chinese goods. Rare earth metals represent one of China’s greatest points of leverage in trade discussions. China controls approximately 70% of global rare earth production and nearly 90% of processing capacity, creating significant supply chain dependence.

Despite the brief selloff, markets quickly recovered following softer language from the White House. Presidents Trump and Xi then met near the end of the month, which resulted in a deescalation and a 10% decline in the tariffs imposed on China.

The Fed continues its easing cycle

At its October meeting, the Federal Reserve lowered interest rates by 0.25% to a range of 3.75% to 4.00%, marking its second consecutive rate cut. This decision reflects the Fed’s efforts to support economic growth while navigating inflation and a weakening labor market. In its statement, the Fed noted that “uncertainty about the economic outlook remains elevated” and that “downside risks to employment rose in recent months.”

Market expectations suggest another rate cut is likely by January, with one or two additional rate cuts in 2026. Beyond policy rates, the Fed also announced it would stop shrinking its balance sheet in December. This means they would continue to buy bonds, effectively maintaining supportive monetary policy.

Retirees face challenges from modest COLA and lower rates

The Social Security Administration announced a 2.8% cost-of-living adjustment (COLA) for 2026, reflecting continued but slowing inflation. For the average Social Security beneficiary, the monthly benefit will be about $2,064, an increase of only $56. While any increase helps, this modest adjustment pales in comparison to the 8.7% increase in 2023, which was the largest since 1981.

The challenge for retirees is that the COLA is calculated using an index that may not reflect the inflation that they actually experience. Healthcare costs, housing expenses, and other categories that weigh heavily in retiree budgets have often risen faster than the overall index.

Chart of the Month