Economic Commentary
Special Note: As of this writing, the federal government has shut down due to the expiration of government appropriations. While the length of the shutdown remains uncertain, we would note that historically, financial markets have shrugged off government shutdowns.
September’s data reinforced the market’s Goldilocks narrative, underscoring why equities continue to advance. Inflation aligned precisely with expectations, confirming the disinflation process remains intact. Importantly, recent price pressures appear to be more closely tied to tariffs and policy distortions than to excess demand—evidence that the inflationary core of the economy is not overheating. This dynamic allows the Federal Reserve room to ease while maintaining policy credibility. At the same time, growth indicators are modestly exceeding forecasts. Durable goods orders, consumer spending, and GDP revisions all point toward an economy trending closer to 2% growth. The rare combination of moderating inflation alongside firming activity is supportive for both equities and bonds.
Meanwhile, the monetary policy narrative is evolving in a significant new direction. New Fed governor Miran has argued that demographic and labor-force headwinds are pulling the neutral real rate lower. Whether one accepts his precise estimates or not, the principle reflects today’s reality: a slower-growing labor force enables the economy to sustain lower real interest rates without igniting inflation. In this context, a nominal funds rate near 3¼ percent may represent equilibrium. With the current Fed Funds rate above 4 percent, the Fed has significant scope to cut. Markets are anticipating a measured sequence of reductions—two quarter-point moves by year-end, followed by additional steps in 2026, contingent upon disinflation progress. Encouragingly, high-frequency data show a labor market that is cooling without collapsing, consistent with the Fed’s soft-landing objective. Productivity gains, potentially amplified by AI-driven investments, are increasing the economy’s potential output while mitigating inflationary risks. While tariffs, fiscal policy uncertainty, and a subdued labor market bear monitoring, none appear disruptive enough to derail the macroeconomic trajectory.
Market Commentary
Global equities ended the quarter with modest gains despite government shutdown concerns, capping what was an exceptional Q3. The S&P 500 advanced 8%, registering 23 record highs and its strongest September in 15 years, up 3.65%. Technology leadership remained decisive, supported by robust earnings and secular growth themes, while communication services also outperformed. Notably, the rally broadened to mid- and small-cap stocks, which gained 6% and 9% respectively, aided by Chairman Powell’s dovish remarks at Jackson Hole. Defensive sectors lagged, reflecting the market’s tilt toward risk and growth. In this environment, equities remain advantaged relative to bonds. Falling interest rates combined with resilient earnings power favor cyclicals, value-oriented sectors, and smaller companies that stand to benefit from easier credit conditions. We are positioning portfolios to capitalize on the superior earnings resilience of U.S. companies relative to their developed-market peers. Domestically, we continue to favor growth over value, particularly in technology and innovation-driven sectors. Internationally, we maintain a preference for value exposures, which offer attractive entry points as economic conditions abroad improve but still lag behind those in the U.S. The broader picture is constructive: the U.S. economy is operating in a healthy equilibrium, monetary policy is set to ease into strength rather than weakness, and equity markets are supported by both fundamentals and liquidity. This alignment provides a favorable backdrop for disciplined risk-taking across portfolios that avoids some of the pockets of market excesses.
Wealth Planning Commentary
I generally do not write on the same topic twice, but yesterday I attended a seminar on charitable giving and came away with many ideas for what to do this year and next year. I will discuss three areas:
- Charitable gift directly from IRAs if you are over age 70
- Taxpayers who take the standard deduction
- Those who itemize their deductions and are high-income earners
Charitable Gifts from IRAs
For those over age 70 1/2, you can make a direct charitable contribution from your IRA to a charity. The new tax law (The OBBBA) keeps in place the same rules as before. Every dollar given to charity reduces the income that will be taxed from your IRA distributions. For example, suppose you took $1,000 from your IRA, but $100 went to your favorite charity. On your income tax return, only $900 would be recognized as income ($1,000 less $100). The limit in 2026 is increasing from $108,000 to $115,000.
Standard Deduction Taxpayers
Taxpayers who take the standard deduction represent more than 90% of US households. Starting in 2026, these taxpayers will be able to deduct up to $1000 (for single filers) or $2,000 (for married filing jointly) for cash gifts to qualifying charities, excluding donor-advised funds. This is a change from 2025. Currently, a taxpayer needs to itemize to claim a charitable deduction.
Recommendation: If you do not itemize, you might consider waiting until 2026 to make your charitable gifts.
Taxpayers who Itemize
These rules are changing. Beginning in 2026, itemized charitable deductions will only apply if your total deductions exceed 0.5% of your adjusted gross income (AGI). Additionally, for those taxpayers in the highest income tax bracket of 37%, the charitable deduction will be capped at 35%. For example, right now a $1,000 charitable gift generates $370 in tax savings. In 2026, this would be limited to $350.
What does this mean for you?
- Consider accelerating your charitable giving in 2025 to receive the full 37% deduction and avoid the 0.5% AGI threshold. Using a donor-advised fund would allow you to get a charitable deduction in 2025 and then grant the money to charities in future years.
- Beginning in 2026, you will want to bunch your charitable gifts so that you clear the 0.5% AGI threshold floor.
Please note that these rules only apply to your federal income tax return. The states have not added a threshold. Additionally, it is important to coordinate with your CPA if you truly decide to maximize your charitable giving because there are income/AGI limits. For example, for gifts to public charities, there is a 60% limit for cash gifts and a 30% limit for gifts of appreciated stock.