September 2025 Market Commentary

Markets continued to soar higher in August, but investors should prepare for weakness in September if history plays out. Investors shift their attention to the Fed, anticipating the year's first interest rate cut. Markets appear frothy, but that should not deter the Fed from cutting rates. A name change is unveiled.

During August, equity markets continued their upward trend, driven by a broader rally beyond just technology stocks. Bonds also saw gains, with investment-grade bonds performing well as interest rate cut expectations and falling Treasury yields drove prices higher. Consumer Discretionary was the best performing sector in August, gaining 7%. Materials, Energy, and Financial Services sectors were each up at least 5% last month. The Utilities sector was the lone decliner, down 2%.

Leaves Fall, So Do Stocks: September's Historical Weakness

As summer fades, so often does investor optimism. September has long held a reputation for market underperformance, driven by a mix of post-vacation repositioning, fiscal year-end portfolio adjustments, and macro uncertainty. While seasonality alone doesn't dictate outcomes, historical data reminds us that caution —not complacency—is the better companion this month.

As the table above indicates, over the past five years, four Septembers have posted negative returns, averaging a 5.7% decline. For perspective, the average monthly return for the S&P 500 Index since January 2020 is a positive 1.1%. While history doesn't repeat, it often rhymes—and September continues to echo caution. However, a few key market factors may deliver a different outcome.

A Monetary Policy Shift from Tightening to Easing

After four years of aggressive tightening, pandemic-era stimulus unwinding, and inflation-driven rate hikes peaking above 5%, the Federal Reserve now stands poised to initiate its first rate cut this year in September—marking a pivotal shift in its monetary policy strategy following its comprehensive framework review and growing signs of labor market softening and disinflation.

In his August 22 speech at the Jackson Hold Economic Symposium, Chairman Jerome Powell signaled that the Federal Reserve may cut interest rates in September by stating "the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance," citing a cooling labor market, diminished inflation risks, and restrictive policy levels. Powell's statement was widely interpreted by economists and markets as a clear indication that the Fed is leaning toward a rate cut at its upcoming September meeting.

A potential September rate cut by the Federal Reserve is a high-stakes decision, fraught with conflicting pressures. On one hand, the central bank is facing a clear softening of the labor market, with slowing job creation and rising downside risks to employment. A rate cut would be a proactive move to prevent a more significant economic downturn by stimulating spending and investment. On the other hand, inflation remains stubbornly above the Fed's 2% target, and new price pressures are emerging from policies like trade tariffs. A premature rate cut could risk reigniting inflation and de-anchoring long-term inflation expectations, which could lead to a self-fulfilling cycle of higher prices and wages.  

"The four most dangerous words in investing are: ‘This time it's different'".

-Sir John Templeton

The Fed's dilemma is further complicated by a series of external factors. The stock market is at or near record highs, and while a rate cut would typically be a boost for equities, it could also exacerbate a potentially overvalued market and increase the risk of an asset bubble. Meanwhile, new trade and immigration policies are introducing structural shocks to the economy, such as constrained labor supply and higher input costs for businesses. The Fed's traditional monetary tools are designed to manage demand, making them a potentially ineffective or counterproductive solution for these supply-side problems.  

Fiscal and legal uncertainties also weigh on the decision. The growing federal deficit, which reached $1.6 trillion by July, could benefit from a rate cut as it would lower the government's borrowing costs. However, there is a concern that a politically motivated rate cut could erode the Fed's long-term independence and credibility. This erosion could ultimately cause investors to demand a higher risk premium for holding U.S. debt, thereby increasing long-term borrowing costs for the government. An ongoing legal challenge to the administration's tariffs introduces an additional layer of unpredictability, as an unfavorable Supreme Court ruling could trigger a fiscal shock by forcing the Treasury to refund over $159 billion in collected duties.  

Given these complex and competing factors, the most probable outcome is a cautious, incremental rate cut of 25 basis points (1 basis point equals 0.01%). This would allow the Fed to address the signs of a weakening labor market while signaling that it has not abandoned its commitment to fighting inflation. The final decision will be a careful attempt to balance its dual mandate with the need to maintain its credibility amidst significant political and legal crosscurrents.

Upcoming Economic Indicators

While the CME FedWatch Tool currently assigns a nearly 90% probability to a September rate cut, the Federal Reserve's decision could still be influenced by key economic data releases in the weeks leading up to the meeting. The most influential reports include the August jobs report (due September 5) and the Consumer Price Index (CPI) release (scheduled for September 11), both of which will offer critical insight into the Fed's dual mandate of price stability and maximum employment. In addition, the Institute for Supply Management (ISM) will release its August report, providing key insights into economic activity, including new orders, production, employment, and prices. For many investors, this moment calls for tactical flexibility: positioning for a rate cut while remaining alert to volatility if the data disappoints.

Easing into Elevation: Fed Policy in a Frothy Market

As we consider the Fed's potential actions and the current market environment, it is natural to reflect on what history teaches us. A common concern is that a Fed rate cut, often signaling economic softness, might undermine a stock market that is already at or near all-time highs. However, the table below shows that investors should remain optimistic. A comprehensive study by Carson Investment Research, which analyzed 20 instances of the Fed's first rate cut between 1980 and 2019 with the S&P 500 Index within 2% of an all-time high, found that stocks were, on average, 14% higher one year later after the initial cut.

This historical data provides a powerful lesson in investment discipline. It underscores why we consistently advise against the temptation to time the market. While there may be bouts of volatility as investors digest news and anticipate the future, history suggests that holding tight to your investments through the noise has proven to be a sound strategy. Given the current market's high valuations, a rate cut could be a catalyst for further gains, but it is also important to have a disciplined, long-term perspective. Every instance of a Fed rate cut near a stock market all-time high has been followed by a year of stock market gains.

A New Chapter

As we mark the closing of the merger between Old Point National Bank and Towne Bank, we also begin a new chapter—one that honors our legacy while embracing a shared future. Under the banner, "Old Point Wealth Management, A Towne Family Company", we're not just changing names—we're reaffirming our commitment to the relationships that define us. The faces you know and trust remain the same, and so does the level of service you've come to expect. It's more than just lip service; it's a promise that while the sign may be new, the values, care, and community spirit behind it are enduring.

We appreciate your confidence and support and encourage you to reach out to an Old Point team member with any questions.

Market Commentary Disclosures

*Magnificent Seven: The term "Magnificent Seven" was coined by others and should not be construed as an endorsement or indicator of any stock or company's quality.

This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Old Point Wealth Management, A Towne Family Company, to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions as of the date given and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Neither past performance or yields are reliable indicators of current and future results.

Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value. Although we define "high quality" stocks as having high and stable profitability (return on equity, earnings variability) the term "high quality" is not a recommendation for any specific investment as stocks may not be appropriate for some investment strategies.

 There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities. A rise in interest rates may result in a price decline of fixed-income instruments held by the fund, negatively impacting its performance and NAV. Falling rates may result in the fund investing in lower yielding debt instruments, lowering the fund's income and yield. These risks may be heightened for longer maturity and duration securities. 

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Index Definitions

Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted average fo the 30 blue chip stocks that are generally the leaders in their industry. It has been widely followed indicator of the stock market since October 1, 1928.

NASDAQ Composite Index: The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Russell 2000 Index: The Russell 100 Index is comprised of the smallest 2,000 companies in the Russell 1000 Index, representing approximately 8% of the Russell 3000 total market capitalization. The real-time value is calculated with a base value of 135.00 as of December 31, 1986. The end-of-day value is calculated with a base value of 100.00 as of December 19,1978.

S&P 500 Index: The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of the available market capitalization.

MSCI Emerging Markets Index: The MSCI EM (Emerging Markets) Index is a free-float weighted equity index that captures large and mid-cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in the each country.

U.S. Aggregate: The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (Agency fixed-rate pass-through), ABS and CMBS (agency and non-agency). (Future Ticker: I00001US)

MSCI ACWI Excluding United States Index: The MSCI AC World ex USA Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1987.