Quarterly Review and Outlook:
September 2025

A Look Back

The above phrase is famously attributed to the Hall of Fame Green Bay Packers head coach, Vince Lombardi. And win he did. The Packers won five NFL championships in the 1960s, including three in a row! His teams were 9-1 in postseason play and the “Lombardi Trophy”, or Super Bowl trophy, is named in his honor. I first heard a version of this mantra in a speech by Arizona football coach Tony Mason in the 1970s. He went on to say, “you’ve got to want to win so badly, that when you lose…you rot inside.” That might be a little much, but it does give you an old-school glimpse of how coaches and other motivators perceived the importance of winning generations ago. We believe we are starting to see a little bit of a re-birth of that old-school philosophy as it plays out in the economy, politics and society in general. Nvidia wants to win as it creates the chips needed to power the AI boom. Amazon is constantly trying to win as they face increasing competition in every facet of their expanding business lineup. It’s been a consistent mantra from the current administration here in the United States. I believe it’s safe to say that many of the technological and scientific breakthroughs we’ve achieved over the last century or so would not have been possible, if not for a bunch of very smart people that wanted to win. Ultimately, just like in sports, there is usually only one true winner…but the desire and effort brought forth in the attempt to win can, and has led to some pretty good things.

We have seen some of this play out in the markets over the first three quarters of 2025. The large-cap S&P 500 was up 3.76% in September alone, leading to a nearly 15% return so far this year. International Emerging Markets exploded in September with a 7.15% return, and is positive by 27.53% YTD…which now puts them ahead of all of the other major stock asset classes. Importantly, the three and five year annualized numbers are off-the-chart. Literally, they are some of the best three and five year returns ever recorded. It points out the crucial fact that you must be invested to participate in those kinds of returns because we are never sure of the magnitude or length of rallies and bull markets.

Other asset classes fared very well so far this year too. The Commodities Index is up over 6%, as gold and silver continue their strong rally. Core bonds continued with strong performance in the third quarter, delivering 2.03%, standing at over 6% for the year with another full quarter to go. The Fed took a long-awaited step and reduced the short-term Fed Funds interest rate by .25% in September. With it they acknowledged a slowing but stable economy with concerns about job growth and consumer spending pressure as inflation remains sticky and higher than desired. Further, the committee indicated their willingness to lower rates further in the near-term if the data continued to indicate a weakening economic picture. At the moment, the market deems the probability of a further rate cut at over 95% in October with an additional decrease likely to happen in December. It’s always been a more difficult job to balance their dual mandate of keeping inflation in check, while looking to maintain a healthy employment situation. A rate cut may help one and become problematic for the other. To date, the Fed has walked that thin line fairly well in their attempt to keep the U.S. on their winning track.

And, speaking of winning tracks…A colleague recently showed me the chart below, and I thought it was so visually stunning that I wanted to share it here. It simply shows the calendar-year performance of the S&P 500 over the last 40 years. Green is good and red is bad. Over the 40 years, it’s been green 33, or 83% of the time. The 40-year time-frame shows a nearly 12% annualized return. That represents around 2% more than the very long-term average. For perspective: a $100,000 investment in the S&P 500 40 years ago would have grown to $4,500,000 at 10% annualized. The same $100,000 would stand at $9,400,000 with 12% returns. We make the point to show just how strong the large U.S. stocks have been…and importantly what that has meant for overall wealth accumulation for those with 401Ks and other investment saving plans. A couple of generations ago, it was usually the case that when people reached retirement age, their largest asset was their primary residence. Today, it tends to be these company savings where the employer often matches a certain percentage of what an employee contributes. The strong performance and the compounding effect of returns over time is powerful. It is the main reason we council younger people to get started with a consistent investment program as early as possible.

The 2025 box shows a question mark, but we know that through September the return was nearly 15%. The other thing that jumps out is that, outside of a clunker year in 2022 and a modestly negative year in 2018, it really has been a remarkably positive environment since the Great Recession timeframe in 2008. Of course, we would all probably give up a little of the long-term positive returns if they were delivered in a more tidy, predictable 8-9% a year…every year. Unfortunately, it just doesn’t work that way. In fact, over these 40 years, there were only three years when the return was within 2% of the long-term average. We get some big years (like 2023 and 2024) along with an occasional more-significant drawdown. It also helps in another way. Knowing that it is a bumpier ride to get to the long-term average really should give perspective. When you experience a down year, you can see that it is often followed by some outsized gains. On the other hand, when you have an extended period of outsized gains, maybe an expectation of a pause or a little mean-reversion shouldn’t be so surprising. In the end, exposure to the S&P 500 has been a winning proposition. I’m sure Vince would approve!

We brought back the table below that shows the performance of all the major asset classes. It does so in a colorful way that makes it clear that there is a rotation that happens over time. For example, Emerging Market stocks are leading the way this year, and if that holds up it would be the first time since 2017. After the Real Estate slump in 2008-09, that asset class led the way for three straight years. Importantly, the white box, which represents a diversified asset class mix of all of the individual asset classes, does extremely well year-in and year-out…without showing up at or near the bottom of the table.

The chart below serves another purpose. I made the mistake of asking a bad question to my team years ago. I asked, “what do you think the probability of a recession is? A savvy team-member quickly answered, “100%”. Of course, that’s the right answer if don’t put any time constraints on. The red areas below show the magnitude of the 34 recessions we’ve experienced in the U.S. since 1855. A closer look reveals that since the Great Depression, frequency and magnitude have significantly been reduced. There are lots of potential reasons for that…ever-improving technologies leading to greater efficiencies, learning from our past, etc. They are not gone, but we are expanding…and winning in much bigger way.

A Look Forward

Most economic indicators show a still-growing, but slowing economy. However, the four big indicators shown in the table below are not currently flashing red. That can certainly change quickly, but the Fed said that they will be data-dependent in how they handle interest rates and that still points to a more measured, reasonable approach.

Finally, we have not discussed longer-term valuations yet. Even though they tell us very little about the present, or even the next several months, they can be useful to understand where we are in a cycle. The chart below shows the average of four different longer-term valuation measures when looking at the S&P 500. And really, one should probably expect after such robust returns over the last several years…they are indeed stretched. To be fair, valuations have been stretched for some time. They came more in line after the 35% decline in the first months of Covid in 2020, but we are now at lofty levels that are over three standard deviations from the average. Ultimately, the metrics eventually return to normalcy by prices coming down, or earnings/growth increasing over time…and maybe a little of both.

We remain neutral in our big-picture asset allocation between stocks/bonds/cash. That has served us well over the course of the year. Our healthy allocation to international stocks has added to overall performance. The diversified approach is front and center this year. Even though we are cognizant of where we are with longer-term valuations, we also know that valuations can stay stretched for quite a while. Most importantly, we are excited about the signs we see that point to a commitment to winning…in our society, economy, and markets!