Market ups and downs are a normal part of investing. This year has seen its share of both. When markets fall, like they did earlier this year, it can feel uncomfortable. But lower prices also mean better opportunities to invest. When markets rise to new highs, some investors worry even when the economy is doing well. In both cases, having a portfolio that can handle different market conditions is key to reaching your long-term financial goals.
As we enter the last three months of the year, investors are seeing mixed signals. The S&P 500 (a measure of the largest U.S. stocks) hit new record highs in the third quarter. Strong company profits and excitement about artificial intelligence (AI) helped push markets higher. At the same time, the job market has gotten weaker since summer. This has raised concerns about the economy and whether consumers are in good financial shape. Despite these concerns, economic growth has been strong and inflation (rising prices) has stayed relatively low.
Times like these show why having a long-term investment plan matters. Instead of reacting to news headlines and economic reports, it’s better to own a well-balanced portfolio that can handle market changes.
What happened in markets during the third quarter
Here are the key things that happened in markets and the economy during the third quarter:
- The S&P 500, Nasdaq, and Dow Jones Industrial Average (three major stock indexes) gained 7.8%, 11.2%, and 5.2% during the third quarter. All three reached new record highs in September. For the year so far, they are up 13.7%, 17.3%, and 9.1%.
- The Bloomberg U.S. Aggregate Bond Index (a measure of the bond market) gained 2.0% in the third quarter and is now up 6.1% for the year. The 10-year Treasury yield (the interest rate on government bonds) ended the quarter at 4.15%.
- International stocks in developed markets rose 4.2% and emerging market stocks increased 10.1% in the quarter.
- Gold reached a new record price of $3,841 per ounce, up 16% during the quarter.
- The Consumer Price Index (a measure of inflation) increased 2.9% in August.
- Only 22,000 new jobs were created in August according to the Bureau of Labor Statistics. Since May, the average monthly pace of job gains has been only 26,800.
- In September, the Federal Reserve (the Fed) cut interest rates by 0.25% to a range of 4% to 4.25%.
Stock prices are high compared to company earnings
For long-term investors, it’s important to look at valuations. Valuations tell us if stock prices are high or low compared to what companies actually earn. The chart shows the Shiller price-to-earnings ratio for the S&P 500. This measures how expensive stocks are relative to their earnings over the past ten years (adjusted for inflation). At 38 times earnings, stocks are more expensive than the 35-year average of 27 times. This is approaching levels last seen during the dot-com bubble in the late 1990s.
High valuations mean investors are optimistic, but they also suggest that expectations might be too high. The S&P 500 has climbed 34% since April, with technology stocks leading the way. The Magnificent 7 stocks have risen 61% since the bottom. Much of this has been driven by excitement about artificial intelligence and business spending on AI technology.
It’s important to understand that valuations don’t predict what will happen to the market in the short term. Instead, they help investors decide how to allocate their money across different types of investments. While the overall U.S. stock market looks expensive, other areas look more attractive. For example, small-cap stocks (smaller companies), value stocks (stocks that trade at lower prices relative to earnings), and international stocks have lower valuations than large-cap U.S. growth stocks right now.
The Federal Reserve is lowering interest rates as the job market weakens
The Federal Reserve cut interest rates by 0.25% in September 2025. This decision reflects the Fed’s attempt to balance inflation that remains above their 2% target with a weakening job market. Lower interest rates generally help support both stock and bond markets if the economy stays healthy.
The job market has been the most important factor in the Fed’s decision. While the unemployment rate of 4.3% is still low by historical standards, job creation has slowed significantly. August saw only 22,000 new jobs added, well below earlier in the year. Even more concerning, recent data shows that 911,000 fewer jobs were created over the past year than originally reported. This would represent the largest revision in history and shows the job market has been weaker than initially believed.
Market volatility has decreased for now
After significant ups and downs driven by tariffs earlier this year, markets have calmed down. The VIX index (a measure of stock market volatility) is around 16.3, below the long-run average of 18. Bond market volatility has also declined.
However, periods of calm can change quickly. Recent years have seen many episodes of increased volatility due to inflation, trade policies, Federal Reserve decisions, recession fears, and geopolitical conflicts. Current events could still cause short-term market swings, even if long-term effects are limited. For investors, this uncertainty is uncomfortable but normal. It’s also what creates opportunities for those focused on the long term.
The bottom line? As we enter the final quarter of the year, markets are near record highs but economic signals are mixed. This makes it important to maintain a balanced portfolio and stay focused on your long-term financial goals.