The U.S. stock market has faced multiple headwinds in 2025. Inflation continues to trend above the level of comfort for the Federal Reserve. Earlier this year, tariffs came into focus as the new administration made them a hallmark of their economic policy. Finally, there is increasing rancor among the political parties, threatening the functioning of the courts and even the government itself (ongoing government shutdown).
How have stocks fared in this tense and chaotic period? Stocks around the world are sitting at or near all-time highs. It may seem counterintuitive, but markets remain resilient.
Investors have looked past inflation, tariffs, and political turmoil, focusing instead on falling interest rate expectations and a less severe tariff impact than initially feared. Political battles show no signs of abating, though their long-term effect on markets has historically been limited.
It is also shaping up to be a strong year for bond investors, as the table below highlights. High yield bonds are performing relatively well, not surprising given that their fortunes usually move with the stock market. It has also been a pretty good year for interest rate sensitive high-quality bonds. Despite the anxiety of inflation, interest rates have managed to drift downward a bit, providing a nice lift to these securities.
What does this mean for the ten FSA strategies that we manage? The quarter was a strong quarter for FSA Wealth Partners’ clients, with most accounts at or near all-time highs, with domestic stocks, foreign stocks, and bonds all contributing.
It has been a challenging environment for active strategies, as the sharp tariff-selloff earlier in the year, followed by the yo-yo-like rebound, put pressure on our safety-first trend-following system. Nevertheless, we got the portfolios back invested by the end of June, so they were able to fully participate in the third quarter rally.
This year has been a particularly good year for the passive strategies that we manage. Even though they were dragged down by the selloff in the first quarter, they bounced back quickly as stocks rebounded in the second quarter. Also, having exposure to foreign stocks and bonds, as well as gold, has helped returns. These strategies are a good complement to the active strategies, and depending on time horizon and risk tolerance, they may be a good addition for your own portfolios.
Long-term investors who are less worried about short-term swings may benefit from a passive, diversified portfolio that rides out the ebbs and flows. For shorter-term or more risk-averse investors, a tactical approach—adjusting portfolios to the current environment—may be preferable, focusing on stability rather than maximum returns.
Perspective Through Year End
Stocks have defied seasonal patterns this year—rallying 20% from May through September, a typically weak period, while posting slight losses in the historically strong November–April stretch. Markets rarely follow pundit predictions. With so many forces at play, it is unrealistic to expect accurate forecasts for any single year.
There are certainly several factors that could trip up investors between now and the year end:
- Increasing angst over sticky inflation pushing up prices on goods/services
- The impact of tariffs on pricing, as well as economic growth
- Growing evidence of an economy beginning to slow down
- An aggressive administration willing to weigh in directly on corporate policy/behavior
At FSA Wealth Partners, we remain guided by market technicals—following overall price trends in the securities we hold for you. On that front, we continue to be rather positive. While technology and related sectors continue to be leaders, there are many places to participate this year, with foreign stocks, small-caps stocks, and even some of the more value-oriented sectors (like financials and utilities) performing nicely.
With valuations extended, it is wise to anticipate possible setbacks, even as we enter a historically favorable season. If 2025 has taught us anything, it is to expect the unexpected.
Portfolio Updates
Please note: Because we manage client portfolios individually, your holdings may differ slightly from the averages described below.
Strategies Using the FSA Safety Net®
Income (Strategy #1)
No trading was conducted in the Income Strategy in the third quarter, as these funds were in sync with the prevailing trends in the bond market. The current allocation remains roughly 50% in high-yield bonds, 30% in defensive/eclectic funds, and 15% in high-quality funds.
Income & Growth (Strategy #2)
This strategy participated along with the rally in stocks and bonds during the quarter. In late July we brought the equity allocation up to its maximum of 50%. In September, we added a modest position in a mid-cap stock fund as smaller companies began to perform well. Currently, the portfolios hold 35% large-cap stocks, 5% mid-cap stocks, 10% foreign stocks, with nearly 50% in bond funds.
Conservative Growth (Strategy #3)
As these portfolios were fully invested at the start of the quarter, they participated along with the gains in the stocks and bond markets. In September, we added a modest small-cap allocation. The current allocation is as follows:
- 60% large-cap stocks
- 5% small-cap stocks
- 10% foreign stocks
- 10% high-yield bonds
- 10% high-quality bonds
- 5% money markets
Core Equity (Strategy #4)
This all-equity strategy participated fully with the rally in stocks, helped by its allocation to large-cap growth funds, technology sector funds and modestly leveraged S&P 500 fund. We reduced the international allocation a bit to make room for a small-cap fund. The money market allocation is less than 5%.
Tactical Growth (Strategy #5)
This “go anywhere” strategy also participated fully with the rally in stocks. Trading was relatively light during the quarter, but we did add exposure to small-cap stocks and infrastructure funds. The money market allocation is less than 5%.
Active Strategies WITHOUT the FSA Safety Net®
Sector Rotation
Finally, we saw a strong performance from this aggressive strategy, as it rode the technology sectors through the entire quarter. As of the October rotation, it continues to hold four technology-related sectors, plus transportation and retail.
Global Rotation
A solid quarter of performance for this aggressive strategy, thanks to its focus on large-cap growth funds, plus an international fund with a large allocation to precious metals stocks. At the end of the quarter, we reduced the foreign allocation from 32% to 16%. The allocation to U.S. stocks is 64%, with 4% in money markets.
Strategies That Remain Fully Invested Through ALL Market Cycles (Passive)
Global Balanced
This conservatively balanced strategy continued to post consistent gains this past quarter, aided by its allocation to small-cap stocks.
Global Moderate
This moderately aggressive strategy continues to perform well in 2025, helped this past quarter by its allocation to small-cap and emerging markets stocks, plus gold.
Global Growth
It is shaping up to be an excellent year for this aggressive strategy, with small, emerging markets and gold providing the biggest contributions to returns.
As always, please contact your advisor if there have been any changes in your circumstances that could affect how we manage your portfolio.
Ronald Rough, CFA
Chief Investment Officer
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FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is available at www.fsawealthpartners.com/disclosures or by calling 301-949-7300.
