Open Again!
2025 caps off another strong year for investors. After a steady and consistent market rise beginning in April, the fourth quarter brought a return of stock market volatility. The government shutdown that began in early October became the longest in history, lasting 43 days, and introduced renewed uncertainty into the markets.
The passage of a temporary funding measure, combined with unexpectedly strong third-quarter GDP growth, helped markets remain resilient. As a result, the major indexes closed the year near record highs. Fixed income markets also posted a strong year, supported by the Federal Reserve’s interest rate reductions, and finished with above-average returns.
As we enter 2026, economic news and sentiment are mixed:
- Inflation remains “sticky” at around a 3% rate, which is above the Fed’s target and may give pause to additional rate cuts. The gradual pass-through of tariff-related costs to consumer prices is cited as a primary contributor.
- Economic growth has remained strong, but fourth-quarter GDP is expected to show a decline due to the impact of the government shutdown. Early estimates suggest the shutdown may have reduced growth by approximately 1.5%, driven by lost wages for federal workers, delayed government spending, and reduced activity in sectors such as tourism and business services (e.g., permits and loans). The current government funding bill expires on January 30, leaving the possibility of another near-term shutdown.
- Monetary policy remains accommodative. The Federal Reserve lowered rates again in December, setting the target range at 3.5%–3.75%. Most projections anticipate one additional rate cut in 2026, although the Fed is cautious to commit before more economic data is available.
- Labor markets and sentiment show some softening. Despite strong growth figures, the unemployment rate has begun to rise, and consumer sentiment has declined steadily throughout the year.
- Fiscal stimulus may provide a modest boost in the coming months. Tax refunds are expected to be higher this spring due to recent tax law changes (enhanced senior deductions, a higher SALT deduction cap, overtime and tip deductions, etc.), which could support consumer spending.
- Since the post-pandemic reopening, there has been a growing separation between economic and market data versus how people perceive and feel about the economy. Instead of converging, this gap has widened. Thus far, consumer spending has remained resilient despite declining sentiment, though concerns are growing that this resilience may weaken.
Despite these crosscurrents, history suggests that markets are capable of adapting to periods of uncertainty. With solid corporate earnings, easing monetary policy, and potential fiscal support on the horizon, the foundation for continued long-term growth remains intact.
As we close out 2025, we remain humbled and grateful for the trust you have placed in us. Thank you for your continued partnership and allowing us to be a part of your journey.
The Pratt Wealth Management Team
