We employ two distinctive dynamic market exposure models in our strategies: one tailored for growth-focused investors seeking aggressive opportunities and another designed for those with a more defensive approach, prioritizing capital preservation. *For illustrative purposes only.
The US equity market finished higher in September with the S&P 500 climbing 3.6%, the Dow up 2.0%, and the tech-heavy Nasdaq advancing by 5.7%. Nasdaq’s outperformance reflected investors’ optimism regarding interest rate cuts, resilient economic data, and preference for growth stocks. Following disappointing payroll data in recent months, the Fed cut the federal funds rate by 0.25% at its September meeting, marking the first rate reduction since December 2024. Despite a softening labor market, positive GDP revision, and stable jobless claims, the data reinforced growth optimism. In the meantime, recent inflation reports have shown continuing inflationary pressures, and we expect the trend to continue in the near future due to higher tariffs and easing Fed policy. Looking ahead, we continue to see downward risks in the near term, including crowded risk asset positions, stretched valuations, and macroeconomic and policy uncertainties. On the other hand, easing Fed policy, decent earnings growth, solid business spending, and weaker US dollars are all expected to bolster the medium-term outlook. With this backdrop, we are cautiously optimistic about the US equity market and have maintained the equity exposure of 69% in our defensive, tailored approach.
Fed Policy: As widely anticipated, the Fed cut the federal funds rate by 0.25% to the range of 4% to 4.25% during its September meeting, marking the first rate reduction since December 2024. The latest Summary of Economic Projections released after the meeting showed higher inflation expectations next year (2.6% for headline and core PCE inflation), slightly higher near-term real GDP growth (4.5% for Q4 2025), and a marginally lower trajectory for the unemployment rate (4.4% and 4.3% for 2026 and 2027, respectively). Chairman Powell explained that the lower interest rate path is driven by risk management concerns, especially given the rising risk of a deteriorating labor market. The payroll data released in the last several months has come in significantly below expectations, with an average monthly gain of 29k in the last three months, compared with an average of 99k in the previous three months. Our baseline expectation is that the Fed will cut the rate by another two 25bps this year, in October and December, due to the ongoing slowdown in job growth and a gradual edging up of the unemployment rate.
Labor Market and Economic Signals: The labor market is softening. Payroll data rose only 22,000 in August, with an average of about 29,000 for the last three months, and June’s small gain was revised to a loss of 13,000. The unemployment rate edged up to 4.3% from 4.2% in July, though the slight increase was partially due to an unexpected rise in labor force participation. Other labor market signals are more modest. The number of job openings decreased for the second consecutive month, declining by 4.3% compared to the same time last year. Hiring and quitting rates remained low, indicating a reluctance among firms to hire and awareness among employees that landing a new job has become more challenging. The four-week moving average of initial jobless claims edged lower, and continuing claims also dipped slightly, suggesting some stabilization in the labor market. Other economic data from this month painted a mixed but cautious outlook. After negative real GDP growth in the first quarter, the U.S. economy grew by 3.3% in the second quarter. The leading economic indicator from the Conference Board, on the other hand, declined by 0.5% in August, resulting in a half-year annualized rate of -5.5%.
Inflation: The August US inflation data indicate that the Consumer Price Index (CPI) came in hotter than expected. The headline CPI rose 0.4% monthly and 2.9% year-over-year in August, while the Core CPI (excluding food and energy) gained 0.3% over the month and accelerated to 3.1% annually. Prices for tariff-sensitive food products increased rapidly, with meat, poultry, and fish rising by 5.4% and roasted coffee jumping 20.9% compared to the same period last year. New vehicle prices rose by 0.3%, the fastest increase since late last year, and we anticipate prices will remain sticky as manufacturers factor in price hikes due to high tariffs. In the meantime, the personal consumption expenditure (PCE) deflator rose 0.3% in August, slightly hotter than expected and lifting the annual rate from 2.6% to 2.7%. The accelerating inflation makes the Fed’s decision-making process more challenging. The FOMC’s September meeting prioritized the labor market and rested on the assumption that tariff inflation will be short-lived.
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As of 9/30/25. Data provided by Bloomberg, NorthCoast Asset Management, Federal Reserve History.
The NorthCoast Navigator is a market barometer displaying NorthCoast's current U.S. and international equity exposure and outlook. This aggregate metric is determined by multiple data points across four broad market-moving dimensions: Technical, Sentiment, Macroeconomic, and Valuation. The daily result determines equity exposure in our tactical strategies.
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