Stocks Hit New Highs as Market Navigates Shutdown, Fed Policy, and AI Spending

Monthly Client Letter
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

Photo Credit: Ruvim Noga, Unsplash

Monthly Market Summary

  • The S&P 500 Index rose +2.3% in October, bringing its year-to-date return to +17.5%. Large Cap Growth stocks gained +3.6% and outperformed the index, while Large Cap Value returned +0.4%. Major stock indices set new highs, with the S&P 500, Dow Jones, Nasdaq 100, and Russell 2000 all posting a sixth straight month of gains.

  • Technology led all S&P 500 sectors, with the Nasdaq 100 gaining +4.8%. Health Care and Consumer Discretionary also outperformed the index, while the remaining eight sectors underperformed, with five sectors trading lower.

  • Bonds traded higher as Treasury yields ended lower despite intra-month volatility. The US Bond Aggregate returned +0.6%, while corporate bonds underperformed. Investment-grade delivered a +0.4% total return, and high-yield gained +0.2%.

  • International stocks split the S&P 500’s return. Developed Markets gained +1.2%, underperforming the S&P 500, while Emerging Markets returned +4.2%.


Federal Reserve Cuts Interest Rates as Government Shutdown Drags On

The government shutdown that began on October 1st remains unresolved as of month-end, officially becoming the second-longest in US history, behind the 2018 shutdown. The shutdown, which is due to partisan gridlock over federal spending and health care subsidies, has disrupted government operations and caused hardship for federal workers. The market has largely dismissed the stalemate as political noise, but the shutdown's length is starting to raise concerns about its impact on consumer sentiment and business activity.

The shutdown has complicated the interest rate policy by halting the release of economic data. Federal Reserve policymakers have had to make decisions without the latest data on the labor market, consumer spending, and housing market. Despite the data blackout, the Fed cut rates by -0.25% in October, its second consecutive rate cut. The decision reflects growing concern about a softening labor market, with Chair Powell emphasizing that employment risks have overtaken inflation risks, despite inflation remaining above the 2% target. The market expects another 0.25% rate cut in December, although the probability fell after Powell said a rate cut is “not a foregone conclusion.”


Stocks Trade Near All-Time Highs Despite Credit Concerns & Trade Tensions

Stocks ended October near all-time highs after they staged a late-month recovery. Credit concerns surfaced early in the month after multiple regional banks disclosed losses tied to commercial real estate fraud. The news came only weeks after two high-profile bankruptcies in the auto sector, reigniting concerns about credit quality. Stocks initially sold off, but by month-end, concerns eased as credit rating agencies and analysts characterized the issues as isolated rather than systemic.

Around the same time, a sudden re-escalation of US–China trade tensions rattled the market just weeks before a high-stakes Trump-Xi summit. It began when China expanded export restrictions on rare earth minerals, prompting the White House to threaten a 100% tariff on all Chinese imports if Beijing didn’t reverse course. The threats sparked a stock market sell-off and revived fears of a trade war. However, despite the harsh rhetoric and threats, both sides left room for negotiation. The Trump-Xi summit took place as scheduled in late October, and the meeting yielded several headline agreements that helped ease near-term US-China trade tensions.


Market Sentiment: Cautious Optimism Ahead of Year-End

Market sentiment is cautiously optimistic heading into the final two months of the year, supported by the Fed’s rate-cutting cycle, continued enthusiasm around AI, and solid Q3 corporate earnings. November and December are historically strong for equities, and while investors are bullish, they’re not euphoric. Despite credit concerns fading and trade tensions easing, other risks remain. Valuations are elevated, investors are questioning the return from AI infrastructure spending, and job growth has slowed in recent months. Chair Powell’s pushback against a December rate cut tempered some enthusiasm, but hopes for a year-end market rally remain intact, even as attention shifts to 2026.

US Market Sector Returns (October in %)

US Market Sector Returns (YTD in %)

 

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

Our Insights

Featured
Stocks Hit New Highs as Market Navigates Shutdown, Fed Policy, and AI Spending
Stocks Hit New Highs as Market Navigates Shutdown, Fed Policy, and AI Spending

October saw markets navigate a complex mix of political and economic developments as the Federal Reserve cut rates by 0.25% amid the second-longest government shutdown in US history. The data blackout caused by the shutdown forced policymakers to act without fresh economic indicators, with Chair Powell citing rising employment risks as the primary concern. Despite political gridlock and mixed economic signals, stocks closed the month near all-time highs after rebounding from early credit worries tied to regional banks and renewed US–China trade tensions. Encouraging progress at the late-October Trump–Xi summit and strong corporate earnings helped restore confidence. As investors look to year-end, sentiment remains cautiously optimistic—supported by the Fed’s easing stance, AI-driven growth enthusiasm, and resilient earnings—though elevated valuations, slowing job growth, and uncertainty over another rate cut keep expectations measured.

Delayed Inflation Data, Fed Rate Cut, AI Earnings, and US-China Trade Meeting
Delayed Inflation Data, Fed Rate Cut, AI Earnings, and US-China Trade Meeting

This week, markets were mixed as early strength gave way to caution following Fed commentary and tech earnings. Stocks initially rallied after last week’s better-than-expected inflation report, sending the S&P 500, Nasdaq, and Dow Jones to new highs. However, the strength faded after the Fed cut, with Chair Powell questioning a December cut. Mega-cap tech earnings also weighed on sentiment, as companies reported strong growth and forecasts for rising capital expenditures. Bonds traded lower, with longer-maturity bonds underperforming. Commodities were mixed: oil gave back recent gains, while gold stabilized after last week’s sell-off. 

Regional Bank Concerns, Q3 Earnings, Government Shutdown, and China Tensions
Regional Bank Concerns, Q3 Earnings, Government Shutdown, and China Tensions

This week, markets were volatile as credit concerns, trade tensions, and an unwind of speculative positions weighed on sentiment. The S&P 500 rebounded early after last week’s regional bank sell-off but lost momentum after the administration floated new software export controls and US–China tensions flared. Bonds edged higher as Treasury yields fell amid economic uncertainty, the government shutdown, and expectations for a rate cut next week. Commodities were volatile: gold and silver spiked early before reversing lower, while oil rebounded late after hovering near a 4.5-year low. The VIX eased after last week’s spike but remained elevated, reflecting caution across markets.

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 22 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

Next

Delayed Inflation Data, Fed Rate Cut, AI Earnings, and US-China Trade Meeting