Upside momentum continued through September as all three major domestic indices rose during the month. The Nasdaq Composite index was the big winner, appreciating 5.4% this month. The benchmark S&P 500 gained 3.5% and the blue-chip Dow Jones Industrial Average increased 1.9%. The Fed’s mid-month rate cut supported the rally, as markets had already anticipated another FOMC move in October. The S&P 500 approached but did not surpass the 6700 level, which remained strong resistance late in the month amid concerns about a possible government shutdown.
The labor market continues to paint a mixed picture. The recent Job Openings and Labor Turnover Survey (JOLTS) data revealed that total job openings increased by 19,000 to 7.23 million, exceeding economists’ expectations of a decline to 7.15 million. However, this apparent strength masks underlying weakness in labor market dynamics, as the vacancy-to-unemployed ratio declined to 0.98 from nearly 1.0, indicating continued cooling conditions. Most concerning is the disconnect between job postings and actual hiring activity—the hiring rate decreased to 3.2%. In comparison, the “quits rate” fell to 1.9% as workers became increasingly skeptical of securing higher-paying positions elsewhere. This behavior suggests that, despite nominal job availability, particularly in healthcare and professional services sectors, workers are demonstrating reluctance to change positions due to diminished confidence in securing improved compensation packages.
Consumer sentiment data from September reinforces these labor market concerns, with the Conference Board’s consumer confidence index declining to 94.2 from 97.8, falling short of the consensus expectation of 96.0. The deterioration was primarily driven by present-situation assessments, which dropped 7.0 points to 125.4, reflecting consumers’ perception that jobs are becoming less plentiful, with the percentage falling to 26.9% from 30.2% in the prior month. While the proportion of consumers expecting fewer job opportunities six months hence remained relatively stable at 25.6%, only 16.1% anticipate increased job availability, down from 17.9% previously. This pessimistic outlook on employment prospects is translating into cautious consumer behavior, with purchasing intentions declining for automotive purchases while home-buying plans reached a four-month high. The convergence of these employment and sentiment indicators suggests that, despite headline job opening numbers, the underlying labor market dynamics point toward reduced worker mobility and growing consumer anxiety about employment security.
Considering what we just typed, we should warn against the prevailing economic pessimism; the U.S. economy is actually positioned to strengthen rather than weaken in the coming months. During the month, we have witnessed several domestic LEIs (leading economic indicators) move higher. While many economists are worried about “stall speed” conditions following disappointing job reports and are predicting a potential recession (see recent comments from Moody’s Chief Economist), our analysis suggests this concern is misplaced. Outside of a shock like Liberation Day in April, we are not forecasting an economic recession. These leading indicators, which historically precede the broader economy, are signaling that economic growth is poised to firm up rather than deteriorate. Separately, global excess liquidity is now a slight tailwind to asset prices compared to the headwind it has been over the last year or so.
Our contrarian view now extends to concerns about inflation, where our forward-looking measures suggest that fears of an inflation spiral are overblown. Stagflation is still a concern, but not a 2021-2022 inflation spike. First, however, consumer goods inflation is increasing due to tariffs, while services inflation is no longer in decline. 72% of the components in the Consumer Price Index (CPI) are rising at a pace that exceeds the Federal Reserve’s 2% inflation target. Importantly, recent moves in several inflation LEIs have turned over in the last 90 days. We emphasize the interesting contradiction in current market conditions. While bond markets are pricing in aggressive Federal Reserve rate cuts due to recession fears, credit spreads (the difference between corporate and government bond yields) are at their tightest levels since the 1990s, which typically occurs only during strong economic expansions. Rather than expecting the worst-case scenarios of recession or runaway inflation that dominate financial headlines, we believe there is a growing chance that the economy’s resilience is giving way to firmer growth.
Please see the following updates on existing positions held at the firm:
Cheniere Energy (Ticker: LNG)— Cheniere Energy has secured a robust path to substantial cash generation, targeting $25 billion in available cash through 2030 while achieving a formal final investment decision on Corpus Christi Midscale Trains 8 & 9, positioning the company for accelerated growth in the rapidly expanding LNG market. The company’s exceptional operational performance is evident in its outstanding second-quarter results, generating approximately $1.4 billion in consolidated adjusted EBITDA, $920 million in distributable cash flow, and $1.6 billion in net income, demonstrating remarkable profitability and cash generation capabilities. Management has confidently raised full-year 2025 guidance, tightening EBITDA expectations to $6.6-7.0 billion and increasing distributable cash flow guidance to $4.4-4.8 billion, reflecting strong operational execution and successful completion of planned maintenance programs. We remain bullish on Cheniere’s prospects.
Farmers & Merchants Bancorp (Lodi, CA) (Ticker: FMCB)- Farmers & Merchants Bancorp delivered strong second quarter results with net income of $23.1 million and diluted earnings per share of $32.94, representing a strong 12.1% increase compared to the same period last year, while achieving the best performing six-month period in company history with $46.1 million in net income. The company demonstrates outstanding operational efficiency and profitability, with a return on average assets of 1.65% and an exceptional return on average equity of 15.09%, supported by expanded net interest margins of 4.07% and continued cost discipline, resulting in an impressive efficiency ratio of 44.88%. Financial strength remains a key focus, as capital ratios exceed regulatory requirements, with a total risk-based capital ratio of 15.35%.
EOG Resources (Ticker: EOG)— EOG Resources leadership made an appearance at a “fireside chat” with Standard and Poor’s. Management highlighted the transformative $5.6 billion Encino acquisition, which accelerates Utica basin development by 2-3 years, unlocking over 2 billion barrels of equivalent resources, while capitalizing on a first-mover advantage in an emerging play with exceptional economies of scale potential. The company demonstrates remarkable operational prowess with over 12 billion barrels of equivalent captured resource generating a 55% average after-tax return at bottom-cycle prices ($45 oil/$250 gas) and over 200% returns at mid-cycle pricing, positioning EOG as a leader across multiple high-quality unconventional basins. EOG’s strategic diversification into high-growth gas markets through the robust Dorado asset showcases exceptional value creation, with production reaching 750 million cubic feet per day by year-end at an ultra-competitive $1.40 breakeven and cash operating costs under $1.00 per Mcf, perfectly positioned to capture 4-6% annual gas demand growth driven by LNG, data centers, and power generation.
On Wednesday, October 8th, we are hosting our quarterly video call. If you would like to join us, please reach out to us, and we will provide the sign-up link. Thank you for your continued trust!
Best regards,
Stash. J Graham