November 2025
US Economy: More weak spots emerge.
The forward course of the US economy remains unclear, but the bulk of October data cleared the way for the Fed to fulfill consensus expectations for another target rate cut: Hiring plans fell to their weakest levels since 2009, consumer confidence reached a 6-month low and the government shutdown has only added to an anticipated slowdown in US GDP growth in Q4. Meanwhile, year-over-year CPI inflation ticked up to 3.0%, the 5th consecutive month with an increase.
US Stocks: All aboard the shoulders of AI.
Winning US stocks continue to be companies with a hand in AI growth potential while most others lag behind as the Magnificent 7 have outperformed the equal weighted S&P 500 by nearly 17% year-to-date. In that vein, communications and utilities sectors performed well but technology returned more than 6% with surging AMD (+58% in Oct.) emerging as a greater AI influence following a chip production deal with OpenAI.
Foreign Stocks: Emerging markets rally.
Emerging markets stocks were the strongest performers globally in September, but China (-1.6%) wasn’t the driving factor as it has been for much of the year. Neighboring Taiwan (+11%) joined South Korea (+21%) in leading results with each country benefitting from its own basket of AI flagship stocks (notably Taiwan Semiconductor and SK hynix) and a persistent an influx of investor capital. Meanwhile, non-US developed markets mostly kept pace with the US.
Fixed Income: Will that be all?
The 10-year US Treasury yield rose to 4.1% at the end of October as Fed Chair Powell’s testimony left further interest rate cuts in doubt and bond investors seemed to price in a greater risk of inflation reaccelerating. Credit markets saw the first meaningful defaults in years with the bankruptcies of Tricolor and First Brands which may indicate more credit stress lies beneath the surface as credit spreads bounced from near all-time tights.
Real Assets: Renewable energy continues rise.
Renewable energy infrastructure equities and gold continued to pace the asset class on the rising demand for electricity and a hedge against US dollar uncertainty respectively. Meanwhile, US REITs (-3.3%) continue to struggle through a secular shift in the usage of office space alongside a downturn in apartments and, more recently, an interest rate outlook that suddenly looks less accommodating.
Alternatives: Diversifiers stay the course.
Hedge funds have delivered returns in line with fixed income and provided ballast in the few short periods when equity markets have struggled this year. Similarly, private credit has quietly posted strong absolute results and is on pace for 8-10% returns at yearend. That said, equity-oriented managers have been able to find the most success, posting double-digit returns in some cases.
Source of data: Bloomberg
Equities Total Return
| OCT | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 2.3% | 17.5% | 21.4% |
| U.S. Small Cap | 1.8% | 12.4% | 14.4% |
| U.S. Growth | 3.5% | 20.8% | 29.6% |
| U.S. Value | 0.4% | 12.0% | 11.0% |
| Int’l Developed | 1.2% | 26.6% | 23.0% |
| Emerging Markets | 4.2% | 32.9% | 27.9% |
Fixed Income Total Return
| OCT | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 0.6% | 6.8% | 6.2% |
| TIPS | 0.4% | 7.2% | 6.1% |
| U.S. High Yield | 0.2% | 7.3% | 8.0% |
| Int’l Developed | (1.7%) | 7.1% | 3.1% |
| Emerging Markets | 0.4% | 7.2% | 6.3% |
| Tax-Exempt | |||
| Intermediate Munis | 0.1% | 4.6% | 4.7% |
| Munis Broad Mkt | 1.1% | 3.5% | 3.9% |
Non-Traditional Assets Total Return
| OCT | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 2.9% | 12.5% | 14.2% |
| REITs | (2.2%) | 2.2% | (2.6%) |
| Infrastructure | (0.3%) | 19.4% | 18.0% |
| Hedge Funds | |||
| Absolute Return | 0.4% | 4.5% | 5.4% |
| Overall HF Market | 0.7% | 6.4% | 7.2% |
| Managed Futures | 1.5% | (1.3%) | (1.4%) |
Economic Indicators
| OCT-25 | APR-25 | OCT-24 | |
|---|---|---|---|
| Equity Volatility | 17.4 | 24.7 | 23.2 |
| Implied Inflation | 2.3% | 2.2% | 2.3% |
| Gold Spot $/OZ | 4002.9 | $3288.7 | $2744.0 |
| Oil ($/BBL) | $65.1 | $63.1 | $73.2 |
| U.S. Dollar Index | 121.3 | 124.5 | 123.8 |
Our Take
In our Q4 commentary we drew the analogy of the financial markets seemingly pricing in the US economy “sticking the landing” in the quarters ahead. Said another way, that many asset classes have risen to valuations that would require upcoming earnings releases, inflation prints and job creation, among other data points, to meet a high bar to support those prices. We didn’t say that everything had to be perfect exactly, but that the data would appear to have a narrow path forward to keep investor optimism. To that end, sometimes bad news is good news if it’s only just a little bad and especially if investors are counting on lower interest rates. In October, the data deteriorated just enough so that it was all but certain to mean a Fed target rate cut, but nothing to indicate a dramatic change in the economic backdrop from this summer. The Fed indeed cut its target but Fed Chair Powell’s testimony made clear that an additional cut in December shouldn’t be counted on.
Go forward Fed Policy is one of our top risks as we finish the final frame of 2025 especially with the Fed in someways blindfolded by the government shutdown. At just about any other time in history a rate cut wouldn’t have been expected based on unemployment, growth and inflation at these levels. We think the Fed believes the labor market will continue to incrementally deteriorate allowing for a “wait and see” approach through year end while banking on three considerations to keep inflation in check:
- The impact of tariffs on prices is likely a one-time adjustment. Though the effects of tariffs are just entering the data but economic research suggests they won’t add sustained price pressure. However, if the President continues to threaten or raise tariffs the one-time transition to new prices may occur over a longer period.
- Consumer and business inflation expectations won’t be unanchored. Inflation expectations themselves are one of the primary factors in realized inflation because of the spending actions and wage demands workers make in the present to circumvent future rising inflation. At this point, 5-year forward inflation expectations have fallen since April and are actually lower than at beginning of year (2.3% then 2.2% now).
- Even if expectations are unanchored, wage inflation won’t accelerate on account of labor market weakening. In other words, the weakening we are seeing in the labor market will be substantial enough that workers won’t have enough leverage to demand raises and kick start an accelerated inflationary cycle.
Of these assumptions the one that seems at risk is number two. While Chair Powell says the target for inflation remains 2%, at one-point markets will question that target if policy doesn’t enforce it. What does this mean for LNW portfolios? We never thought Fed rate cuts would mean longer-term interest rates would come down in lockstep. Conversely, the potential for longer-maturity yields rising we have called out as an underappreciated risk that could reprice equity and bond markets simultaneously.
This underscores that it is crucial to have diversifying exposures to those two traditional asset classes. Cash and short-term fixed income still offer relatively attractive yields and less interest rate risk should longer-term yields move up. Among the others, real assets remain compelling for their protection from an inflationary economic backdrop while diversifiers like hedge funds can help us turn an uptick in volatility into opportunity. To that end, we have enjoyed nearly three years of robust returns and while tax-management is important, trimming the winners is a critical discipline in delivering attractive long-term risk-adjusted performance.
