CAISSA Quarterly Considerations – 2025 Q3

Video Transcript

Welcome to the IC Quarterly Considerations. As we wrapped up the 2025 third quarter, hopefully you found our quarterly webcasts monthly perspectives in the chart of the monthly good way of absorbing information from our investment committee.

Keep a special lookout for the get to know our investment committee spotlight, where we are highlighting the three KAISA members on the investment committee, as well as our partner team of over 80 analysts, 37 of which are CFAs that make up our investment selection team to support all of our clients.

So keep on a lookout for that. I’m here to today to provide a little bit of insight on what we’re looking for into considerations for our portfolios as we wrapped up Q3 and we’re heading into Q4.

So here we go. There’s our lovely disclosures. Uh, okay. So markets, uh, they were widely positive in the third quarter of 25, 20 25 with fixed income equities and diversifying assets, all posting nice gains. Um, despite recent shifting labor dynamics,though the broader economy has res remained resilienteasing money policy at favorable earning season
and a clarity on trade agreements, particularly with Europe, have helped driven markets higher. While the economy appears pretty steady, though there’s some cracks emerging in the labor markets.

So unemployment has risen to about 4.3% here, and recent jobs reports are showing sharp downward revisions. So with non-farm payroll growth slowing month after month, of course, here’s that decline in that farm payroll.

These are signs of weakness and they’re supporting the F omcs, which is the Fed or j Powell when you think about it. Their decision to cut its target rate by a 25 basis points in September, and we did it again last week by a 12 to two vote. And you can see the dips right here.

This is the red that’s, that’s, uh, since the cutting rate cycle, since 2024 versus all the other cutting rate cycle cycles. But, uh, this last week and in the last couple of months, by a 1210 to two vote, this central banks FOMC lowered its benchmark overnight bargain rate to a range of 3.75 to 4%. Their tone has turned a little bit more dovish. As the labor market, which is what we’re looking here, the labor market conditions have softened even as inflation or inflation is remaining a bit stubborn at its 2% rate, and that that’s their target.

Uh, they’re turning just a little bit more dubbish as we look into markets. Global markets outside the US have been surging this year, so you can see a little upward trend. This is emerging markets, uh, and, uh, the efa, so, um, Europe, far east, et cetera. Uh, they have surged this year with a standout performer such as China and Korea.

They’ve delivered some returns of more than 50% year to date.That strength though, reflects the combination of factor of factors, including more attractive valuations relative to the US equities, the weaker dollar, and a reduced policy uncertainty. So that in the US though, flip the coin over here to small caps, and they have also rebounded recently as investors are expecting that companies are gonna benefit a little bit more fromfalling interest rates.

So small caps have surged in this third quarter, beating large caps by almost more percent. Almost 4% is measured by the Russell 2000 and the s and p 500. If we look at just asset class returns, we’re gonna stay here for just a little bit because there’s some, some things that we wanna hit on.

But interest rates, if we think about fixed income on this side of the, of the graph here, interest rates have declined in the third quarter. Uh, again, they, they targeted 25 basis points, and then another 25 last week that rate cut drove short term yields down lower and softening labor data looming government shut down risks, all pulled down, yields just a little bit, excuse me, the move lower in interest rates also boosted though fixed, fixed income assets with the Bloomberg aggregate bond climbing about 2%, and again, 2% right here is the quarter to date return the asset class a year to date return is sitting on top of it.

Um, the Bloomberg high yield index, although grazed about 22.5%. That is despite stretched valuations, there’s support by strong demand for income, solid corporate fundamentals and expectations that there’s gonna be further monetary ing. Uh, valuations and credit have remained EL elevated and spreads hover near the tightest levels in a decade. I’m gonna get to some, some of that. I’m gonna show you where that tightness is in a couple slides here.

Now, on the equity side of things, that’s in the middle of this chart right here. Uh, US equities delivered some really strong gains, 8% for large caps, 12.4% for mid caps, oh, excuse me, for small caps year to date or quarter to date. Um, and they’re being supported by the easing monetary policy as well. Easing monetary policy, meaning interest rates coming down and lowering a little bit.

Tariff rates have settled below initial peaks, which is good. Small caps by the Russell 2000 were up 12.4% and they were out outperforming the large caps at 8%. That’s, again, fueled by a lot of expectations by these rate cuts. Investors are expecting those smaller companies to gain more from falling interest rates, given that they have higher leverage compared to the large cap peers. Uh, the optimism about stronger earnings in 2026 reinforced the edge during the quarter. So, um, the last place we’re gonna look here is, is international.

Excuse me, I’m gonna circle these two right here. They finished higher overall, but their performance has varied across regions. Emerging markets stood out with really nice double digit returns, 10.6% by measured by the M-S-C-I-E-M index, and a lot of that was driven by China’s surge of more than 20% supported by the easing trade tensions and a lot of AI growth.

The developed international growth delivered a more modest return. They’re pulling back after 25%, year to date, only had a quarter up about 4.8%, and that’s favored by some currency moves, attractive valuations and accommodative policies. But again, emerging markets being really supported by China’s surge of 20%. Sometimes we can rely on that, sometimes not. Sometimes that’s a lot of sovereign, uh, sovereign, uh, money chasing and propping up some, some China numbers.

So we have to watch that very carefully as we dig into some of the fixed income and what it means to our clients. We look at the yield curve, and that’s represented here by different time periods. So starting off the yellow in, in September of 2024, and the darker blue is, is June of 25. The lighter blue is September of 25, and you can even move that just a little bit up higher after last week’s, uh, cut in of 25 basis points as well.

But really, we wanna look at this short end. It really remains incredibly steep and inverted in the short term, in the very, very, very short term. Now, the long term has moved up about 50 basis points in the 10 year area, and that really has been kind of a fulcrum that’s, that’s been sticky there for a very long time. But we do cons, uh, expect that it’s gonna keep moving back towards that reversion with the next few interest rate cuts.

Uh, adding to it, and this is what I promised you a little bit earlier, but we’re gonna talk about those corporate credit spreads, meaning the difference between high yield, which is the dark blue high yield spreads or high yield, uh, yields versus investment grade spreads.

So really if to be paid for the risk that you’re gonna take in, in worsening credit, meaning high yield, you wanna get paid for taking on that risk versus not taking the risk. And right now, those, the spread of those interest rates are so tight and so close together that we’re don’t feel right now.

We’re getting paid to take that additional risk. So that being tightened, we’re watching this, we’re, we just don’t find much attractive in that yield right now, but we’re looking for them to, uh, widen to participate. Uh, anything more additionally? So, quick update on the equity market, uh, in Q3.

I’ll try and go through this really quick. If we look at US domestic equities, small cap, really crushed large cap in the quarter. Growth has doubled an outpaced value. Again, that’s a lot of that ai, that technology, that growthy type of company, if we look at international developed, uh, had a nice quarter, nothing to run home about, but had a very nice quarter.

But Canada was, uh, had a really nice, nice uptick of about 10% in internationally. Now, once we get to emerging markets, we had talked about it a little bit with China. China bumping up about 20% for the quarter in India, really having a tough quarter down 8%. So, uh, that, that’s a huge thing that we’re watching for international or international funds that may have overweighted India versus China. If we look at real assets.

So real assets can be inclusive of industrial metals, precious metals, agriculture, energy REITs, et cetera. Uh, REITs benefited from those falling interest rates in the quarter delivering pretty much modest gains over the NA reit. All equity REITs index returned about 2.7%. Healthcare was leading the way, uh, at up about 20, excuse me, 14.8% on the quarter, but a year to date up 26%.

And the defensive sectors outpaced the broader market retail posting strong returns, again, thanks to that resilient consumer spending despite labor market shifts. But that could turn as the labor market turns as well. If we look at commodity performance for the third quarter, they delivered some mid single digit gains for the quarter.

Uh, the commodity index, uh, by Bloomberg is up about three point a half percent. But the really, the sharp rally that we’re gonna look at is precious metals up 19.2% in the quarter, uh, really being led by gold, uh, hitting new highs and, and, um, and really fueling that.

That, uh, was also fueled. Gold can be fueled by fed rate cuts. So persistent inflation and heightened concerns over the government shutdown is, is all taking part of that flight to safety. As we wrap up here, we just wanna also remind ourselves that Kais is proactively rebalancing portfolios this fall in a very, very large way.

Over the long run, we’ve learned if we stay consistent in our balanced portfolio, and if you look at these balanced portfolios that are in the yellow, and they always seem to tend to be in this middle band, uh, and this is asset classes that are doing better, better than the balanced portfolio are only three this year.

The balanced portfolio is beating the rest of these asset classes. So if you have a little bit of everything in the right mix, you’re going to stay less risky than the broad market or, and not have to pick and choose which particular asset class is gonna be the one that’s gonna win. That way there’s always gonna be an outlier that’s a winner, but it really does remove the gamble on which that a, on which asset class that is in 2025.

International has been the clear winner leading the way, but our balanced portfolio is really participating in all of those asset classes. And a lot of times you can see those asset class classes flip on a dime or be the top one year, the bottom the next year, and we’re eliminating that risk. And so once one of our winners gets a little bit overwhelmed, we take a little bit off the top, we re rebalance that to some of our losers and we stay balanced that way.

So, as a recap, thank you for spending a couple minutes of your day with us. We hope that, uh, you’ll provide us some feedback or ask any questions on our website following this video. There’s a link that you can click on and look for that spotlight that I talked about in the earlier in the, in the, uh, webcast.

And again, thank you very much. Have a have a great day.