Schwab’s Market Perspective: Dancing In the Dark
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With the U.S. government still in shutdown mode, the list of missing economic reports—such as nonfarm payrolls, construction spending, and the trade balance—continues to grow. So far, domestic stock and bond markets have taken the shutdown in stride, but the recent tumble over trade tensions shows that volatility can quickly resurface for a number of reasons. Globally, growth appears to be slowing but could pick up next year.
U.S. stocks and economy: Can't start a fire without a spark
U.S. government data are the gold standard in terms of depth and breadth, so with the Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), and other agencies closed, markets and investors have little to guide them. It's worth noting that the BLS is calling back employees to put out September's delayed consumer price index (CPI) report, which is now slated for release on October 24.
Until then, we're left sifting through data from the private sector, such as ADP's employment report. That report, which tracks private sector jobs, showed a decline of 32,000 in September—far worse than August's decline of 3,000, which itself was revised down from an initially reported gain of 54,000. In essence, the labor picture was already much worse than expected heading into September.
The ADP report often gets a lot of flak for not mimicking the BLS's monthly nonfarm payrolls report, given the (at times) large difference in the two data sets. However, the relationship over the past three months looks like it's growing tighter, at least when it comes to the trend, as you can see in the chart below.
Private sector payroll growth slowing
Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics (BLS).
Nonfarm payrolls as of 8/31/2025. ADP payrolls as of 9/30/2025.
On the inflation front, we'll know more after the BLS sends out September's CPI report. However, assuming the government remains shut down, we won't see the producer price index (PPI) or personal consumption expenditure (PCE) price index—so the inflation and broader economic backdrop remains darker given the lack of available government data.
Markets have mostly taken the shutdown in stride, evidenced by the still solid (but not exceptional) percentage of S&P 500 members trading above their 200-day moving average, but we anticipate further volatility and disruption if the shutdown lasts for several more weeks—especially given the potential for CPI and payroll data to not be collected.
Market breadth steady, not exceptional
Source: Charles Schwab, Bloomberg, as of 10/10/2025.
Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. Technical analysis is not recommended as a sole means of investment research. Past performance is no guarantee of future results.
Fixed income: No data? No problem!
The fixed income markets have settled into a quiet range in the absence of fresh economic data. Markets are still discounting several interest rate cuts by the Federal Reserve over the next six months, and volatility is near its four-year low. However, it is far from clear that the Fed has room to cut rates as rapidly as the market is expecting.
Source: Bloomberg.
Merrill Option Volatility Estimate (MOVE INDEX). Daily data from 10/1/2021 to 10/10/2025.
Note: Merrill Option Volatility Estimate is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options.
The Fed is caught in a tug-of-war between a slowing labor market and persistent inflation. The pace of job growth has dropped sharply from an average of 111,000 per month in the first quarter to just 29,000 in the past three months, and the unemployment rate has begun to edge higher. However, inflation has been stuck at just under 3% for most of the year, well above the Fed's 2% target.
Source: Bloomberg.
PCE: Personal Consumption Expenditures Price Index (PCE DEFY Index), Core PCE: Personal Consumption Expenditures: All Items Less Food & Energy (PCE CYOY Index), percent change, year over year. Monthly data from 8/31/2015 to 8/31/2025.
Slowing job growth allowed the Fed to cut the federal funds rate by 25 basis points, or 0.25%, to a range of 4.0% to 4.25% at its September meeting. We anticipate one or two more rate cuts this year, but further easing would require either much weaker economic growth or lower inflation in 2026. It may be that volatile trade and economic policy will weaken the economy next year, but solid consumer spending and business investment in technology have kept GDP growth in the 3% region for the past few quarters. Consequently, the dilemma for policy makers may continue.
We continue to expect the dominant trend in the Treasury market to be a steeper yield curve, with the difference between short- and long-term yields widening. Short-term interest rates will follow the Fed's policy moves, but long-term yields are affected by inflation and expectations for economic growth, which remain elevated. For investors, we continue to favor keeping average duration in the intermediate-term (five to 10 years) part of the yield curve.
Source: Bloomberg.
U.S. Generic 2-year Treasury Yield (USGG2YR INDEX) and U.S. Generic 10-year Treasury Yield (USGG10YR INDEX). Daily data from 10/1/2024 to 10/13/2025. Past performance is no guarantee of future results.
In the credit markets, valuations look stretched. While we believe returns will continue to be solid in the investment-grade corporate bond market, the yield spread relative to Treasuries of comparable maturities is very narrow. Any bump in the road for corporate profits could lead to a widening of those spreads—especially in the high yield market. We suggest investors remain cautious on lower credit quality bonds since the extra yield to compensate for risk is so low. The municipal bond market looks relatively more attractive for high-income investors, since yield spreads over Treasuries are closer to long-term averages.
Lastly, the strongest-performing segment of the fixed income markets year to date has been international developed market bonds. With many global central banks lowering interest rates and the dollar falling against most major currencies, returns have risen. Since we anticipate a moderate further decline in the dollar in the year ahead, we see international bonds as a place where investors may benefit from diversification.
Source: Bloomberg.
Total returns from 12/31/2024 through 10/10/2025. Total returns assume reinvestment of interest and capital gains. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Indexes representing the investment types are: Preferreds = ICE BofA Fixed Rate Preferred Securities Index; HY Corporates = Bloomberg US High Yield Very Liquid (VLI) Index; Bank Loans = Morningstar LSTA US Leveraged Loan 100 Index; Long-term US Agg = Bloomberg US Aggregate 10+ Years Bond Index; IG Floaters = Bloomberg US Floating Rate Notes Index; IG Corporates = Bloomberg US Corporate Bond Index; US Aggregate = Bloomberg US Aggregate Index; Intermediate-term US Agg = Bloomberg US Aggregate 5-7 Years Bond Index; Municipals = Bloomberg US Municipal Bond Index; Treasuries = Bloomberg US Treasury Index; EM (USD) = Bloomberg Emerging Markets USD Aggregate Bond Index; Securitized = Bloomberg US Securitized Index; Agencies = Bloomberg US Agency Bond Total Return Index; TIPS = Bloomberg US Treasury Inflation-Protected Securities (TIPS) Index; Short-term US Agg = Bloomberg US Aggregate 1-3Years Bond Index; Int. developed (x-USD) = Bloomberg Global Aggregate ex-USD Bond Index. Past performance is no guarantee of future results.
Looking ahead, the re-opening of the federal government and resumption of economic reports may lead to a rebound in bond market volatility. In addition, concerns about tariffs and fiscal policy have the potential to re-surface.
International stocks and economy: Growth slowing near-term, pick up in 2026?
Global economic growth this year has been better than expected but could slow in coming months. The September Global Purchasing Manager Indexes (PMIs), leading indicators of future economic activity, showed declining momentum in both manufacturing and services. The Global Manufacturing PMI has bounced around in recent months, weakening in the wake of the April tariff announcements from the U.S. and recovering recently. Manufacturing new orders remain in expansion territory, but inventories have grown faster, which could lessen the need to increase output in the future. Services continue to show robust growth, with financial services outpacing consumer and business sectors.
Growth may have slowed during September
Source: Charles Schwab, FactSet, S&P Global as of 10/09/2025.
The Organisation for Economic Co-operation and Development (OECD) also calculates leading indicators of economic growth, designed to provide early signals of turning points in business cycles. The leading indicator for the G7 and G20 group of countries1 shows continued strength, indicating economic growth in aggregate could accelerate going into 2026.
Leading indicators suggest growth to pick up in coming months
Source: FactSet, Organisation for Economic Co-operation and Development (OECD), as of 10/9/2025.
100=long-term average.
Markets—which are forward-looking by definition—seem to agree with this assessment. Cyclical sectors are outperforming defensive sectors in non-U.S. markets as represented by the MSCI EAFE Index. Cyclical sectors such as financials, industrials, materials, consumer discretionary and information technology tend to be positively correlated to economic growth and tend to outperform during bull markets. Defensive sectors such as consumer staples, health care, and utilities outperform when growth is slow and falling, and fall less during bear markets. International markets tend to be cyclically oriented, with consumer discretionary, financials, industrials and materials sectors alone accounting for 60% of the MSCI EAFE Index as of September 30, while technology is just 8% of the index.
Cyclical sectors outperforming defensive sectors
Source: Macrobond, as of 10/09/2025.
Indexes are unmanaged, do not incur management fees, costs, and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
There are risks to this outlook. The number of economies reporting manufacturing PMI gains in September fell from 75% to 32% and for services PMIs, the number fell from 60% to 40%, suggesting a slowing in global momentum. Additionally, the full economic impact of tariffs has not yet been felt. Growth in world trade this year has benefitted from front-loading of shipments and artificial intelligence (AI) spending but could slow next year from this higher base, according to the World Trade Organization's October 7 update. Fiscal stimulus and secular trends such as spending on the AI arms race can offset the impact of tariffs for now, but there is some concern about an increased dependence on AI spending for global growth.
1 The G7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. The G20 consists of Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States, the European Union and the African Union.
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