IMG Q3 2025 Investor Letter

Happy Fall!

 

As summer’s green fades into shorter and cooler days, we are reminded that change, albeit unwelcome at times, is normal. Autumn is a period of transformation, as seen in the changing colors of the leaves and their eventual fall from the trees. This decay precedes the cold and barren winter, only to recover and flourish in spring and summer. The seasons give perspective on current market conditions. Political discord, geopolitical unrest, government shutdowns, and a slowing economy are nothing new and have happened throughout history. Markets will rise and fall, and like nature’s cyclical rhythm, the markets will recover and persevere over time. Our disciplined approach to asset allocation is designed to participate in market upswings and also mitigate downside risk. We invest in sound companies with earnings growth and solid long-term fundamentals. Our diversified portfolios are positioned to protect you throughout changing political, economic and geopolitical landscapes.

The impact of tariffs on prices so far has been muted and inflation remains in check, albeit above the Federal Reserve’s (Fed) 2% target. The consumer price index (CPI), which measures costs of goods and services across the economy, increased 0.4% in August, up 2.9% from a year earlier and the biggest monthly jump since January. Excluding the volatile food and energy categories, core prices rose 3.1% from a year earlier, the same as in July. Meanwhile, the personal consumption expenditures (PCE) price index, which reflects changes in the prices of goods and services purchased by consumers in the U.S. and is the Fed’s preferred indicator of inflation, increased 0.3% in August and is up 2.7% from a year ago. Excluding food and energy, the core PCE price index was little changed in August, rising 0.2% and up 2.9% from a year ago. Alternately, the producer price index (PPI), which tracks the price changes companies see before it hits consumers, eased 0.1% in August after advancing 0.7% in July. Compared with a year earlier, producer prices rose 2.6%. 

 

The labor market appears to be softening and settling into “low-fire, low-hire” mode. ADP data showed private employers cut 32,000 jobs in September. Private payrolls for August were revised sharply lower to a loss of 3,000 after data initially showed a gain of 54,000. Notably, the drop in private payrolls was led by small and medium-size businesses, especially service-providing companies. Companies employing over 500 people actually added 33,000 positions in September. According to ADP Pay Insights data, the increase in wages for workers who changed jobs slid to 6.6% in September from 7.1% in August whereas wages for those who stayed in the same job remained steady at 4.5%. Given the federal government shutdown, the Bureau of Labor Statistics has yet to release its September jobs report. However, the most recent report showed that the U.S. added 22,000 jobs in August and the unemployment rate crept up to 4.3%, the highest level since 2021.

 

Fears of higher prices and a slowing labor market have weighed on consumers’ outlook. The Conference Board’s confidence index, which measures consumer attitudes on prevailing business conditions and likely developments for the months ahead, fell to 94.2 in September, down from 97.8 in August and its lowest level since April. Similarly, the University of Michigan’s consumer sentiment index, which is used to estimate future spending and saving, fell to a reading of 55.1, the seventh lowest on records going back to 1952.

 

Despite this backdrop, consumer spending remains healthy. Retail sales rose 0.6% in August, marking the third straight month of spending increases, following a weak first half of the year. However, much of that strength has been fueled by higher income households (and those more likely to have investments). For context, Moody’s Analytics data as of June 30th shows the top 20% of earners accounted for more than 63% of all spending, and the top 10% accounted for more than 49%, both the highest on record, according to data that goes back to 1989. Put another way, there is a widening disparity between the haves and the have nots, with a larger share of middle and lower-income households experiencing increased strain by the higher cost of living.

 

Real gross domestic product (GDP), the broadest measure of economic output, increased at an annual rate of 3.8% in the second quarter of 2025 versus a 0.6% decrease in the first quarter. The increase in real GDP in the second quarter primarily reflected a decrease in imports (after earlier stockpiling ahead of tariffs) , which are a subtraction in the calculation of GDP, and an increase in consumer spending.

 

Even with ongoing pressure from the administration to lower interest rates, the Federal Reserve continues to adhere to its wait and see approach: weighing risks to the economy, adjusting interest rates as those risks change, and going where the data leads. Ultimately, the balance of risks shifted from inflation toward the employment side of the Fed's mandate, and after nine months of leaving rates unchanged, the Fed cut its benchmark interest rate by 0.25% to a range of 4% to 4.25% at its September meeting. Chairman Jerome Powell said the rate cut was a precautionary move to support hiring, not the start of a desperate rescue, and Fed officials expect two more rate cuts this year.

 

After declining in the first quarter, U.S. stocks continued to rally in subsequent quarters. The S&P 500 rose 10.9% in the second quarter and another 8.1% in the third quarter. Year to date, the S&P is up 14.8% and the technology heavy Nasdaq is up 17.9%. Fun fact: the S&P 500 has hit 28 all-time highs since the start of 2025 through the end of September.

 

Eight out of 11 sectors posted positive returns in September, with Energy (-0.4%), Consumer Staples (-1.6%) and Materials (-2.1) lagging. Still, all 11 sectors are positive year to date. Technology (+22.3%) and Communication Services (+24.5%) were the top performing sectors in September, as well as year to date, benefiting from optimism about artificial intelligence (AI). 

 

Whereas growth and value started the quarter in tandem, with both styles up 6% as of June 30th, growth has since become the clear leader. The Russell 1000 Growth index is up 17.2% year to date compared to the Russell 1000 Value index, which was up 11.7%. 

The third quarter for U.S. fixed income markets was another volatile one driven by geopolitical, trade, monetary and fiscal policy uncertainties. Despite the fluctuation in rates throughout the quarter, we ultimately saw U.S. Treasury yields decline across the interest rate curve. The yield on the 10-year U.S. Treasury note ended September at 4.15%, 7 basis points (0.07%) lower than where we started at 4.22%.

 

Early in the quarter, investors saw higher than expected inflation data causing U.S. interest rates to rise with the belief that it may delay the U.S. Federal Reserve from cutting interest rates in the near term. Indeed, the Fed did keep rates unchanged at the July 30th meeting and pledged to continue monitoring data reports to ensure proper steps were being taken to achieve their dual mandate of maximizing employment and price stability. August brought the much-anticipated annual Jackson Hole conference speech by Fed Chairman, Jerome Powell, where his comments fueled a treasury rally expressing higher concern about weakening employment. Immediately, interest rates declined as expectations for an upcoming rate cut increased dramatically from the week prior. Citing a softening labor market, the Fed did reduce rates by 25 basis points (0.25%) at the September meeting to a 4% - 4.25% range. 

 

With an inverse relationship between bond prices and interest rates, the declining interest rate yields have been a tailwind to performance. In fact, on both a quarter to date and year to date basis, the fixed income markets have produced positive returns across sectors. 

The Fed’s recently published dot plot, which illustrates each members projection for upcoming rate expectations, indicates an additional two 25 basis point cuts by the end of 2025. While yields ultimately may be lowering, it is important to remember that bonds play a critical role within a portfolio providing income as well as diversification.

All diversifying equity asset classes were positive for the quarter, save for MLPs (-1.22%). Gold and Emerging Markets added significant relative value in the quarter, outperforming the S&P 500. Year to date, equity diversification has been beneficial, with foreign stocks, Emerging Markets, Global Infrastructure and Gold significantly outperforming the S&P 500. Gold has benefited from ongoing economic and geopolitical uncertainty, due to its safe-haven status and ability to remain a reliable store of value.

 

Performance across diversifying fixed income asset classes was positive for the quarter and year to date. The investment grade and high yield credit sectors were among the top performers as credit spreads (the premium required over U.S. Treasuries) has continued to tighten. Separately, emerging markets sovereign debt surged, up 4.06% in the quarter and 9.68% year to date.