When you invest in the stock market, prices go up and down regularly – this is normal and has been happening throughout this year. When markets fall – like when trade fees caused a recent drop – it can feel worrying. However, these drops can also be good times to buy investments at lower prices. On the flip side, when markets bounce back and hit new record highs, some investors feel nervous even when companies are doing well. In both situations, it’s important to own a mix of investments that can handle all types of market conditions while keeping your long-term money goals in mind.
As we start the last three months of the year, investors are seeing contradictory information. The S&P 500 (a measure of 500 large U.S. companies) hit new record highs in the past three months. Markets were helped by companies making good profits and excitement about artificial intelligence (computer systems that can learn and make decisions). At the same time, fewer people are finding jobs compared to earlier this summer, which raises worries about the overall economy and whether people have enough money to spend. Despite this concern, the economy has been growing well, and price increases (inflation) have mostly stayed under control.
Times like these show why having a long-term investment plan is so valuable. Instead of making quick decisions based on news headlines and economic reports, it’s better to own a well-built collection of investments that can handle market changes. This means understanding the bigger trends that will affect markets in the coming months.
Important Market and Economic Events in the Past Three Months
- The S&P 500, Nasdaq (focused on technology companies), and Dow Jones Industrial Average (30 large U.S. companies) gained 7.8%, 11.2%, and 5.2% during the past three months. All three reached new record highs in September. For the year so far, they have risen 13.7%, 17.3%, and 9.1%.
- The Bloomberg U.S. Aggregate Bond Index (a measure of bonds, which are loans to companies and governments) gained 2.0% in the past three months and is now up 6.1% for the year. The 10-year Treasury yield (the interest rate on U.S. government bonds) ended at 4.15% after falling as low as 4.02% in September.
- International stocks from developed countries (MSCI EAFE) rose 4.2% and emerging market stocks (MSCI EM, from developing countries) increased 10.1% in the past three months.
- Gold prices hit a new record of $3,841 per ounce, going up 16% during the quarter.
- Bitcoin ended at $114,641, gaining during the quarter but still below its August high point.
- The U.S. Dollar Index (which measures the dollar’s value compared to other currencies) fell to a low of 96.63 in September before ending at 97.78. So far this year, the dollar has declined 9.9%.
- The Consumer Price Index (which measures price increases for everyday items) went up 2.9% in August while core CPI (which excludes food and energy) rose 3.1%.
- Only 22,000 new jobs were created in August according to the Bureau of Labor Statistics. Since May, the average number of new jobs each month has been only 26,800.
- In September, the Federal Reserve (which controls interest rates in the U.S.) cut rates by 0.25% to a range of 4% to 4.25%.
Stock prices compared to company earnings continue climbing to historic levels
One of the most important things for long-term investors to consider is how expensive or cheap the overall market is. Rather than just looking at the price of stocks, we need to understand what we’re getting for that price in terms of company profits, cash flow, sales, dividends (payments to shareholders), and other measures of company health. When prices are high compared to these measures (called “high valuations”), it means investors are feeling optimistic. However, it also means that expectations might be too high in some areas of the market.
The chart that comes with this article shows this using the Shiller price-to-earnings ratio for the S&P 500. This measure compares stock prices to company earnings. The current value of 38 times earnings is well above the 35-year average of 27 times and is approaching levels last seen during the dot-com bubble (a period in the late 1990s when technology stock prices became extremely high). This measure provides a longer-term view than standard price-to-earnings ratios because it uses ten years of earnings history, adjusted for inflation.
It shouldn’t be surprising that prices are at these levels given the strong recovery of the past six months. The S&P 500 has climbed 34% since April 8, resulting in a double-digit gain for the year. Technology stocks in various areas have led the market both up and down. The Magnificent 7 stocks (seven large technology companies), for example, have risen 61% since the bottom. While investors are increasingly asking whether corporate spending on artificial intelligence will generate positive returns, the reality is that this has been a major driver of the broader market and business investment.
It’s important to understand that these valuation measures don’t predict short-term market movements and shouldn’t be used to time when to buy or sell. Instead, they help guide decisions about what types of investments to own. While the broad market looks expensive, this isn’t true for all parts of the market. For example, small companies, value stocks (companies trading at lower prices relative to their fundamentals), and international stocks have more attractive valuations than large companies, growth stocks (companies expected to grow rapidly), and U.S. stocks right now. This can create opportunities for investors who look broadly and have longer time horizons.
The Fed is lowering interest rates due to job market weakness
The Federal Reserve (the U.S. central bank that sets interest rates) cut interest rates by 0.25% in September 2025, continuing its process of lowering rates after keeping them steady through most of the year. This decision reflects the Fed’s attempt to balance two goals: dealing with inflation (rising prices) that remains above their 2% target while also addressing a weakening job market. This rate cut was widely expected and has helped support markets in recent months.
Several factors make this rate-cutting cycle unique. In the past, the Fed has usually been forced to cut rates in response to economic crises or recessions (periods when the economy shrinks). While there are some signs of weakness today, overall economic growth remains healthy. So, recent cuts represent something different: an attempt to return policy to normal after the rapid rate increases that began in 2022. This is one reason the Fed is lowering rates even while the economy continues to expand and markets trade at all-time highs.
Perhaps the most important factor driving the Fed’s decision has been the weakening job market. While the unemployment rate of 4.3% remains low compared to history, the pace of new job creation has slowed dramatically. August saw only 22,000 new jobs added, well below the average of 123,000 from earlier in the year.
Even more striking are the revisions to job numbers suggesting that 911,000 fewer jobs were created over the twelve months through March than originally reported, as shown in the chart above. The Bureau of Labor Statistics revises the job numbers each year based on more accurate data than was available when each monthly jobs report was first released. While the numbers are still preliminary, a revision of this size would be the largest in history, showing that the job market has been weaker than originally believed.
Therefore, the Fed is cutting rates because, according to their latest statement, they believe that “downside risks to employment have risen” (meaning there’s a greater chance the job market could weaken further). For investors, rate cuts typically help support both stocks and bonds if the economy remains strong.
Market swings and policy uncertainty have eased for now
After significant price swings driven by tariffs and taxes earlier this year, measures of economic policy uncertainty have improved. The VIX index (which measures expected stock market volatility or price swings) is around 16.3, below the long-run average of 18. The MOVE index (which measures expected bond market volatility) has declined to 78, below the average of 87.
As many long-term investors know, calm periods in the market can change quickly. The last several years have seen many episodes of increased volatility due to inflation, trade disputes, government policy changes, the Fed’s actions, recession fears, international conflicts, and more. The current government shutdown is just the latest event that could shake markets in the short run, even if the long-run effects are limited. Similarly, how tariffs will ultimately play out and their impact on inflation remain uncertain.
For investors, this uncertainty may feel uncomfortable, but it’s also what drives long-term results. The last several years also show the difference between what investors feared and how markets actually performed. Rather than viewing uncertainty as something to avoid, successful long-term investors recognize it as a normal feature of markets that creates opportunities to position portfolios for the years ahead.
The bottom line? As the final three months of the year begin, markets are near all-time highs despite mixed economic signals. This situation emphasizes the importance of maintaining the right mix of investments and staying focused on your financial goals.
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