GAINING CONVICTION

With the U.S. government shutdown in place, many of the key economic datasets that the Fed relies on to provide important information about the direction of both growth and inflation are absent. The September jobs report is a real-time example: The critical nonfarm payroll report was not expected to be released by the Bureau of Labor Statistics (BLS) on Friday morning, as the BLS is temporarily closed due to the shutdown. Other real-time labor market data will also be delayed, including the weekly unemployment claims report, which contains important information about trends in U.S. workers filing for unemployment benefits. On the inflation front, we expect CPI data by mid-October, though this is also at risk if the shutdown continues.

This is particularly bad timing, and not only from the Fed’s perspective. The October CPI report is used to calculate the 2026 Social Security cost-of-living adjustment. This Fed has placed a heavy emphasis on following the data — not anticipating changes, but reacting as the data comes in. This forces the Fed to use survey-based data, which can prove to be less accurate and timely.  

With official data absent, there is renewed focus on other sources of information. This week, the monthly ADP payrolls report took on increased significance. This report showed a loss of 32,000 private-sector jobs in September, which was a downside surprise against expectations for growth in jobs, and it represented the largest decline in over two years. This corroborates other data from the BLS that was released just prior to the shutdown. The monthly Job Openings and Labor Turnover Survey showed that the number of job openings in the U.S. increased only slightly while the share of total employment is stuck around a five-year low point. The rate of hiring fell to 3.2% — the lowest rate outside of the COVID period since 2013.

We remain in a “slow hiring, slow firing” mode, which is a concern. If the pace of firing picks up, we could see a sharp adjustment in the unemployment rate. We continue to look for evidence that companies are setting the stage for broader layoffs, and the good news is that we don’t see that yet. We will be listening carefully to Q3 earnings releases and conference calls to assess how corporate management teams are assessing their labor pools. This sense of relative stagnation in the labor market is certainly prominent on the Fed’s radar and will be a driving force in the decision to continue policy easing.

Investors are optimistic and are voting with their feet, with global equity funds experiencing the best week of inflows in nearly a year, led by U.S. technology and financial stocks. The third quarter was strong across both risk- and risk-control portfolios, with global equities gaining over 8%. In the U.S., small caps gained over 12% for the quarter, with both growth and value participating in the exceptional returns. This strong quarterly performance puts small-cap returns into double digits for the year, with the Russell 2000 gaining 10.4% year-to-date.

The large capitalization S&P 500 gained over 8% for the quarter, leading to a nearly 15% return this year. Emerging Markets remained strong over the summer, up over 10% for the quarter, leading to a year-to-date gain of nearly 30%. And while Developed ex-U.S. markets lagged U.S. and Emerging Markets for the quarter with a 5.4% return, the MSCI EAFE index has gained over 25% year-to-date.

Bonds held their own during the quarter as well. Both the taxable Bloomberg U.S. Aggregate Bond index and the Bloomberg 1-10 Municipal benchmark gained over 2% for the quarter, leading to solid mid-single digit gains year-to-date.

The continued weakness in the U.S. dollar is lending support to both multinationals and U.S. investors who are invested in non-U.S. markets. Export-focused companies and multinationals here in the U.S. are enjoying a competitive advantage as a weaker greenback is making their goods and services relatively more attractive. With the current backdrop of easier monetary policy eroding yield differentials globally, the market anticipates that the weakness in the U.S. dollar will continue. Further, the slowdown in economic data, including the softer labor market conditions, may be a precursor to a more protracted economic slowdown, undermining investments in the dollar. And finally, the “flight to safety” quality of the U.S. dollar may be under pressure with the heightened level of fiscal stress and related high level of federal debt.

All that said, the currency tailwind has been pronounced this year for U.S. investors investing in non-U.S. equity markets. It is worth noting that while Developed ex-U.S. equity markets have outperformed the S&P 500 when adjusted for the currency impact, these markets are more neck-and-neck with the U.S. achieving only a small performance advantage year-to-date.