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Quarterly Letter to Clients

October, 2025

Indices at quarter-end (September 30, 2025):

Dow Jones Industrials: 46,397.89 3Q'25 +5.22% YTD +9.05%

Standard & Poor's 500: 6,688.46 3Q'25 +7.79% YTD +13.73%

In mid-September the Fed lowered interest rates by one-quarter of one percent. The Street has adopted the stance that two more cuts of that size are likely before the end of the year. Inflation remains a little above the Fed's desired number, but worries about jobs seems to be the main factor for the cuts. Everyone likes lower rates except those whose livings depend upon interest income, "rentiers" in classic economic parlance, as opposed to "entrepreneurs." Most of my client base falls into the former category.

History shows us that when the Fed begins to cut rates stocks do well. One can only hope.

The economy continues to chug along, though certain corners are showing some stress. Housing is clearly slowing, and employment, while still essentially full, is not as robust as previously. Things like a lower demand for cardboard would seem to indicate a slowing of the retail sector, but to my eye the malls and stores still seem to be busy. Autos have been firm.

During the quarter stocks and bonds made nice gains. The "Magnificent 7" have continued to lead, but the market appears to be broadening out. Gold continues to rise, reflecting worries about the economy and our currency (which remains weak). Bonds, as one would expect, have been firm, though at current yields are not especially tempting.

An interesting and unusual development is that the government has taken an equity interest in Intel, and a few other companies. This perhaps ties in to the CHIPS act, intended to bring chip design and manufacture back to the U. S. Intel has rebounded dramatically, and we shall see if this investment pays off for taxpayers, whose money it is that finances this investment.

In theory, this is like a sovereign wealth fund, where a government invests in companies as a strategic and economic ploy. I am not aware of other democratic nations investing like this, though it is common in non-democratic countries. Of course, we do "invest" to save various companies from time to time; think banks and S&Ls, Boeing, Amtrack, GM, Chrysler and AIG. But those actions were taken to stabilize industries, not as an investment.

The imposition or threat of tariffs has started an economic war. Last year we sold over $12.5 billion worth of soybeans to China, more than half of American production. This year, zero. The full weight of tariffs is expected to be felt during 2026, but as yet has not seemed to exert any large impact. The list of items dependent on cross-border flows is very long. If tariffs are actually fully implemented, pretty much everything that you buy will go up in price.

We are a nation that is still a powerful manufacturing center, and we rely on certain international trade to supply vital components. I am thinking here of rare-earth elements, which are vital to the production of everything from automobiles to jet fighters. Most of these elements have been coming here from China, and that supply has been curtailed as a result of tariff skirmishes. How that supply line will be resolved is yet to be determined. But perhaps government investment could spur domestic mining and refining of these materials. This is new ground.

Markets are a puzzle, and I am a puzzle worker, and one way to solve this particular puzzle is to not bet against stocks. For 45 years now the longest periods of falling stock prices have been 12-18 months, and then they resume their climb to new heights. Can this go on? Yes, of course it can. But will it?

My personal history is shaped by the period 1968-1982, when I was a new broker, and stocks plunged to their nadir in 1974, losing 45%. The recovery, top to bottom to top, was a slow and difficult fourteen-year slog. Ouch. But I was young and had time to recover. It is different now.

Then, in 1982, in what I consider the "modern age" of markets, stocks took off, and basically have not looked back since then. Markets are no longer dominated by individual investors, but rather by giant funds that do not react with panic as readily as the "little guy." Crashes have been of the "mini" sort, sharp, quick, and quickly resolved. We should hope that remains the norm.

While I am always a bit nervous, I still believe investing in a blend of quality stocks and bonds will prove to be the right stance over the longer term.

Jim Pappas