Markets Shining Brightly

September saw the Federal Reserve cut rates for the first time this year, great news for multi-asset portfolios! Markets gained broadly as both US and UK stocks hit new records and gold also surged to previously unseen levels. UK assets largely brushed off difficult headlines surrounding the UK’s fiscal backdrop while, in China, technology stocks soared with renewed investor optimism. Bond yields were little changed over the month, but their income generated modest returns. Over the quarter, despite much political volatility, stocks significantly outperformed bonds amidst little signs of stress in markets.

Key to the positive tone over recent weeks was the Federal Reserve’s interest rate cut. Although inflation is a little above target, which typically restricts interest rate cuts, there has been some weakening in the labour market which provided sufficient justification to cut rates. The committee also released their latest ‘dot plot’ – a chart representing the members’ individual projections for the future path of interest rates and it showed that, although the committee were mostly in agreement over the 0.25% cut, there remains a large variation in expectations for what comes next. On average, two more 0.25% cuts are expected by the end of the year. Taking a step back from the policy minutia, the recommencement of rate cuts is undoubtedly good news for households and corporates and should continue to support spending, investment, and profits.

Household net worth in the US is at all-time highs, underpinned by asset prices. It is also now estimated that corporate spending on AI is so large that it is notably boosting economic growth as the required infrastructure is built. M&A activity has also picked up with global activity up over 30% so far this year. This is a positive backdrop that we expect to further sustain stock prices over the medium term. In addition, cutting rates with inflation above target helped gold (which is supply-constrained and, therefore, desirable in inflationary environments) jump over 10% in September.

Stocks in China, which represents around 30% of emerging market indices, made strong gains in September as large technology companies soared. Many factors have helped build confidence in the sector. For example, a meeting earlier in the year between President Xi and China’s big tech groups demonstrated a renewed political interest in the sector. Moreover, we have observed recent announcements of more spending on AI infrastructure, progress on Chinese chip designs, and the regulator banning large Chinese technology companies from purchasing AI chips made by the dominant American technology company, Nvidia. This government intervention signals a shift towards supporting domestic corporate profits which has been good for Chinese stocks. Furthermore, Chinese savers have not historically allocated significantly to stocks, but these changes may help to build confidence. We do feel however that recent gains appear somewhat disconnected with economic fundamentals with both inflation and consumer confidence extremely low.

In the UK, data showed that the government borrowed £83.8bn in the first five months of the fiscal year, the highest for that period since the onset of the pandemic. The shortfall was well above the £72.4bn forecast for April to August by the Office for Budget Responsibility (OBR), the UK’s fiscal watchdog, as tax revenues grew by less than expected. It is now widely believed that the OBR will downgrade their productivity estimates ahead of the November budget, which would mean the estimated fiscal deficit increases further as projected growth (and taxes) are downgraded. Sterling fell modestly but Gilt yields and UK small cap stocks, which are often most directly impacted by the domestic situation, ended the month largely unchanged – perhaps suggesting a lot of bad news is already priced in. Large caps continued to gain and had their best quarter since 2022. The upcoming November budget remains key to the outlook.

Bottom Line

The big picture environment remains one where government spending and AI investment are high, and most central banks are inclined towards rate cuts. This provides support to economies, consumers and earnings. Regional performance varied in September, serving as a reminder that strategically diversifying allocations can be beneficial.

Noteworthy

Should investors be concerned about markets reaching all-time highs?

No, investors should not be alarmed. Markets hitting record highs is actually very common and typically reflects gains from long term economic growth and corporate innovation. Recent analysis from Schroders notes that in nearly 1,200 months of data, US equity markets have been at all-time highs in 31% of months, meanwhile BlackRock highlight that the US market has set new records about 18 times per year on average. Moreover, it is crucial to note that investing at record highs has not historically harmed returns. Schroders’ research shows that 12 month returns after investing at a peak averaged 10.4%, versus 8.8% at other times. Over longer horizons, returns are very similar whether you invest at a high or not. BlackRock confirm that since 1957 buying at peaks has made little difference to one-, three-, or five-year returns. The real risk to investors is attempting to time the market by trimming exposure when the market hits record highs. Schroders calculate that $100 invested in US equities in 1926 would have grown to $103,294 by the end of 2024. Disinvesting for just one month after each new high was set would have cut this to $9,922, a 90% reduction. Even over 10, 20, or 30 years, exiting the market after each new record high reduces returns by 27%, 37%, and 58% respectively. The lesson therefore is clear: remain invested, avoid market timing, and trust the diversification embedded in a multi-asset portfolio.

US Government shutdown

As of this morning, the US government has entered a shutdown after Democrats and Republicans failed to reach agreement on the federal budget, with healthcare subsidies emerging as the central point of contention. This marks the first government shutdown since 2018–2019, when a dispute over President Trump’s $5.7 billion border wall request led to a record 35-day closure. With both parties engaging in political brinkmanship ahead of the 2026 midterm elections, it remains uncertain which side will ultimately concede in an increasingly polarised legislature. The shutdown has immediate consequences: entire federal departments are forced to suspend operations, leaving hundreds of thousands of employees without pay and disrupting the delivery of public services. The impact also extends to economic data. Key releases such as inflation and GDP figures are put on hold, depriving the Federal Reserve of crucial inputs as it approaches its next policy meeting, potentially forcing the central bank to make decisions with limited visibility. From a market perspective, investors are drawing on the precedent of past shutdowns, which have typically ended before inflicting lasting economic damage. Wall Street, as a result, has largely looked past the turmoil. However, a short-term spike in volatility remains likely if delayed data clouds the outlook for interest rates or if Trump follows through on his threats of mass government layoffs during the shutdown which could further strain a softening labour market.