Transitions
It is that time of the year again when transitions take place. Baseball gives way to football, summer to fall, and green landscapes to brown ones. September is also when traders return from their summer vacations and work on rebalancing portfolios heading into the end of the year. That is partially why September can be a rough month in the markets – especially after a particularly strong summer. Transitional words are used to describe what is going on. Words like “and” or “also” or “furthermore” are agreement or similarity words while words like “but” or “besides” are opposition or contradictory words. Words that are used to describe examples or add emphasis are words like “including” or “specifically” while transition words that describe an effect or a consequence are words like “therefore” and “consequently.” When discussing the markets transitional words are necessary and multiple versions of transitional words may be used to describe what is happening or what might be coming. Therefore (like how I did that?), let us transition into the meat of this commentary by reviewing the markets and then look at the economy as we transition into fall!
Financial Markets
August was not much of a transitional month this summer as far as the markets are concerned. It was more of a “furthermore” type of month as the markets continued to plow ahead. Specifically, the Dow gained 3.42% in August while the S&P 500 added 2.03%. Mid-cap and small-cap stocks performed very well as they added 3.39% and 7.06% respectively during the month. Tech stocks cooled down a bit but still gained 1.65%, as measured by the NASDAQ, and the EAFE added 4.06% during August. Bonds had another good month as the Bloomberg US Aggregate Bond index rose 1.20% during the month. The markets ended the month with an eye cast on the Fed and what they might do in September. A quarter-point rate cut seems to be baked in (from the markets perspective) and anything other than that could cause some volatility. With much of the economic data a mixed bag and the markets trading at lofty levels, September could face some volatility no matter what the Fed does. While a correction is not likely to occur at this point, the markets may take a breather to digest earnings reports and forecasts. As was mentioned last month, the varying economic and tariff data is a recurring storyline in 2025 and one that has, and can, cause investors who lack patience to drive themselves silly over what to do with their investments. However, patient, long-term investors should be able to ride out the volatility and be rewarded in the long run. For additional market and economic data, please see the end of this commentary.
The Economy
The American economy tends to go through cycles – not boom and bust necessarily – but cycles, nonetheless. Think of the industrial revolution or the tech boom of the late 1990’s and another one in the early 2000s. We are now in the midst of a new cycle with the AI revolution. Transitions. We have been lucky to not have had a recession for a number of years (barring the short-lived COVID related recession in 2020) but our growth has not been all that spectacular either. Our current environment includes not only what is going on with AI (new resources, changing employment landscape, different technology), but the changes to trade policies (tariffs), and immigration issues (labor force availability, etc.). Our economy continues to slow but continues to grow, and, if anything, is growing faster this year than expected and a recession is not necessarily baked into the books for next year either. Interest rates may be headed lower as inflation has settled although inflation is expected to tick slightly higher. Unemployment data shows a softening but not a sharp rise in unemployment and, over the long term, new jobs should be created if all the new investment in the U.S. comes to fruition. Corporate earnings have surprised to the upside, and the markets continue to reach higher. Transitions continue to happen in our economy and markets – let us just hope the next step is not downward into a recession or even a strong market correction or bear market. Not likely, but we will keep an eye on things and maintain our defensive nature to managing portfolios.
GDP (Gross Domestic Product) – A transition has occurred in economic activity, as measured by GDP, each quarter this year – and the third and fourth quarters will likely show another transition. The first quarter contracted by 0.5% according to the third estimate, while the second quarter reversed course as GDP grew at a 3.3% rate according to the second estimate. GDPNow had forecasted a growth rate of 2.6% (as of July 3rd) for the second quarter, and many economists estimated the number would be around 3.0% or so. Third quarter GDP is expected to be lower, although GDPNow is forecasting a 3.0% rate for the third quarter as of September 2nd. Full-year estimates continue to show a slowing economy and vary between 1.5% and 2.5% but those numbers will likely rise if the third quarter number is more consistent with what GDPNow is forecasting. Longer term, it is expected that GDP will settle in at a steady, if unspectacular, rate in the 2.0% range, like pre-COVID levels.
Inflation – Transition occurrences are like a rollercoaster ride. Up and down and up and down. The difference with inflation is that prior to COVID, inflation was basically flat since the Great Recession. The money supply had not risen rapidly since 2008 but did so during and after COVID and, guess what, inflation took off as well once the money supply rose. Once the Fed tightened the reins the money supply stopped growing and fell eventually, and guess what, inflation fell as well. Since then, even though the rate of inflation has generally fallen, it did not do so in a straight line and the transition back towards 2.0% inflation has been like the proverbial rollercoaster and gone up and down. We are now back in one of those shorter-term points where the rate is moving a bit higher, but expectations are that the rate will move lower as we head into 2026 and eventually reach the 2.0% rate. Like the CPI, Truflation has risen a bit in recent days as well and, as of September 2, 2025, was at 2.03%. Do not read too much into the data over the next couple of months – especially if Truflation does not rise significantly since that is based more on real-time data than just the past twelve months. The good news is that the rate is not rising fast enough or far enough at this point to keep the Fed from cutting rates in September.
Unemployment – Transitions take place all the time in the employment data. Or so it seems. Each month the U.S. Bureau of Labor Statistics reports changes in the total nonfarm payroll employment and the corresponding unemployment rate. They also report any adjustments to past data. While the unemployment rate is slow to adjust (generally it moves up or down a tenth of a percent each month), the actual jobs data bounces all over the place and never seems to be on target. For August, payrolls increased by a tepid 22,000 jobs (gains in healthcare offset by losses in federal government jobs) versus expectations of gains of 75,000. The unemployment rate increased to 4.3%. June’s job numbers were revised downward to negative 13,000, while July’s numbers increased by 6,000 to 79,000. So, transitions continue to take place in the number of jobs created (or lost as in June), but overall, there has been little change in the jobs data since April. The data likely supports the Fed in cutting rates in September as the economy is clearly not overheating and the employment data remains on the weak side.
Wisconsin (3.1%) and Madison (2.7%) bucked the trend, as preliminary July numbers showed an improvement in the state data and a flat report for Madison in terms of their respective unemployment rates.
The Fed Watch
The Fed clearly needs to be in a period of transition from tightening to loosening in terms of its policies. Inflation, while rising a bit in the short run, is expected to continue to fall over the next year with or without tariffs. The employment environment has clearly slowed in terms of job creation, but the actual rate has not increased much over the past few months and is not expected to move much higher. So, while the two main targets for the Fed clearly are not moving in the right direction (inflation in the short term) or are not getting any better (unemployment rate), the transition to a less tight Fed needs to happen to help fortify the economy. Therefore, the Fed should cut rates in September and perhaps again before the end of the year by twenty-five basis points each. Some are calling for dramatic cuts by the Fed, but that likely won’t happen unless, or until, the economy falls into a recession. The Fed itself will go through a transition next year, as Chairman Powell’s term as Chairman will expire on May 23, 2026 (he can stay on the Board until January 31, 2028, however), and he will not be reappointed to that position by President Trump. Since the President wants to see the Fed be more aggressive in cutting rates, it is almost a certainty that the President will nominate someone who is more dovish when it comes to interest rate policy. Consequently, the Fed will be front and center in the eyes of investors and economists.
Tariffs
Talk about transitions. Just wait a few hours and tariff policy will change! There is no point in focusing on what tariff policy will look like over the next month or two, but it is certain that it will look different than it does today. What we can do, however, is look at the data in terms of tariff revenue. Monthly revenue reached $29.6 billion in July and the year-to-date number through August 29th is over $159 billion. While this is helping to reduce the federal deficit, it is not enough to solve the looming deficit crisis. For example, the budget deficit for fiscal 2025 (ending September 30th) is expected to be about $1.9 trillion and so tariff revenue will be less than ten percent of the deficit, although everything helps. The only certainty regarding tariffs is that they will stay in a state of flux (or transition)! Finally, so far at least, the tariffs are not significantly affecting inflation, and the Fed has even grudgingly admitted that.
Outlook/Summary
Transitions occur daily, whether in our personal lives or in the markets and the economy. Certainly, our economy (and markets) is going through some transitions right now as they deal with tariffs, changing interest rate policy, strong earnings, tax changes, and deregulation. Growth may be slowing, but for now we do not believe that a recession is imminent. The markets are overvalued, but strong earnings help minimize the potential of a correction, and lower interest rates may help spur economic activity such as housing. How we prepare for these transitions defines how we deal with them when they occur. Planning ahead is one way to deal with change, but another way is to just react to changes as they occur. From an investment perspective, we choose to prepare for the inevitability of change versus just reacting to change as it occurs. That is why we take the approach that we do to protect the downside (the bad types of transitions) first but still look for upside potential (the rewarding types of transitions). That may mean that we miss short-term momentum moves to the upside, but we minimize the impact of the downward moves. Therefore, we diversify, we do not participate in market timing trading activities, and we allow time to work in our favor. Should you like to discuss your portfolio or if our strategy can potentially work for you, please call the Wealth Management division of Lake Ridge Bank at (608) 826-3570. We look forward to speaking with you.
Market/Economic Data
As of August 31st, 2025…. Unemployment data is through August for national, July for Madison and Wisconsin (both preliminary); inflation data is through July:
| Index | Month Return | YTD Return | Index | Month Return | YTD Return or Current |
|---|---|---|---|---|---|
| DJIA Industrials | 3.42% | 8.30% | EAFE | 4.06% | 20.36% |
| S&P 500 | 2.03% | 10.79% | Blm US Agg Bond | 1.20% | 4.99% |
| S&P 500 Equal Weight | 2.69% | 8.69% | Inflation (CPI All-items) | 0.2% | 2.7% annualized. Truflation 2.03% 9/2 |
| S&P 400 | 3.39% | 5.28% | U.S. Unemp. | 4.3% | 22,000 new jobs |
| S&P 600 | 7.06% | 3.23% | Wisconsin Unem. | n/a | 3.1% |
| NASDAQ | 1.65% | 11.60% | Madison Unemp. | n/a | 2.7% |
Thank you for your business – we look forward to speaking with you soon. (Note – this commentary used various articles from JP Morgan, Morningstar, the Wall Street Journal, Investor’s Business Daily, Northern Trust, CNNMoney.com, msn.com, Kiplingers.com, nytimes.com, Fidelity Investments, American Funds, LPL Financial and other tools as sources of information.
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