Weekly Economic and Market update

October 7th, 2025

Last week

Last week closed the 9th month and the 3rd qtr. of 2025. October began with a government shutdown. However, the markets did not seem to be too concerned about the shutdown.

The Russell 2000 posted the largest gain on the week with a +1.72% gain, +2.96% gain on the month +12.02% on Q3 and YTD 9.75%. Followed by the NASDAQ with a +1.32% change from the previous week, +5.61% on the month, a +11.24% gain on Q3, and YTD posting the highest return with a +21.17% return. The S&P 500 index rose 1.1% last week +3.53% on the month +7.79% on Q3, with a YTD return of +20.81%. The Dow ended the week up +1.1% on the week, +1.87 on the month +5.22% in Q3, with a YTD return of +12.31%. The DOW, S&,P and NASDAQ all reached their all-time high marks last week.

The market started the final quarter of 2025 with health care stocks rallying after President Donald Trump said Pfizer agreed to provide some of its most popular medications at "heavily discounted prices." The agreement was seen as lifting a cloud of uncertainty that had been hanging over the sector and is expected to be followed by deals with other drug makers.
Some economic reports have been delayed by the US government shutdown. The September jobs report was due last Friday, but updates from the Bureau of Labor Statistics have been suspended until the government resumes operations. Jobs data released last week continued to point to a stagnant labor market.

Treasuries rose on Wednesday, and yields fell after data from ADP showed US private-sector jobs dropped unexpectedly in September. The US lost 32,000 jobs in September, well short of an expected gain, and August’s data was also revised to a loss. September’s loss was the third decline in the past four months. The data added to bets that the Fed will cut rates two more times this year to support the employment side of its dual mandate. The next FOMC meeting will be at the end of October, on the 28th and 29th 
Additional economic data released last week showed consumer confidence fell to a 5-month low in September on a dimming view of job prospects, according to The Conference Board. The ISM services index unexpectedly shifted to neutral in September, with activity remaining the same as last month. Meanwhile, manufacturing activity measured by the ISM Manufacturing Index contracted for the seventh consecutive month. Data scheduled for this week include the August trade deficit, consumer credit, and wholesale inventories. The minutes of the Federal Open Market Committee's September meeting are also due to be released. A lot of attention will be placed on earnings calls over the next several weeks, which will give more insight into the economy

Sectors

Six of the 11 sectors posted positive returns last week, led by healthcare. The health care sector logged a +6.8% gain for the week, followed by a +2.4% increase in utilities and a nearly +2.3% rise in technology. Industrials, materials, and real estate also edged higher. Pfizer's shares climbed +15% on the week amid its deal with Trump. Other strong gainers in the health care sector included shares of Bio-Techne (TECH), up 21%; Charles River Laboratories (CRL), up 19%; and Thermo Fisher Scientific (TMO), up +17%. In the utilities sector, shares of Constellation Energy (CEG) rose 8.7% as the company reached a $340 million agreement with the state of Maryland to fund environmental projects and operational improvements at the Conowingo Dam. The deal will allow the relicensing and continued operation of the hydroelectric facility on the Susquehanna River.
On the downside, energy fell nearly -3.4%, followed by a -2.1% drop-in communication services and a -0.8% decline in consumer discretionary. Consumer staples and financials also edged lower.
The energy sector's drop came as crude oil futures also fell on the week. Stock decliners in the sector included Valero Energy (VLO), which fell -8.7%. The stock received an investment rating downgrade from Morgan Stanley to equal weight from overweight, even as the firm raised its price target on the stock to $175 per share from $160. Earnings reports are expected next week from companies including PepsiCo (PEP), Delta Air Lines (DAL), Constellation Brands (STZ) and McCormick (MKC).

Drama in Washington 

The government is once again at an impasse over federal funding. The failure to reach an agreement has shut down the government just as the 2026 fiscal year begins. This seems to happen so often that it feels like national ritual. Lawmakers and the media (especially the media) manufacture a crisis precisely on schedule, as though chaos were part of the budgetary process itself.

The situation is an example of a serious issue America has compared to other countries, especially China. As Dan Wang points out in his recently published book Breakneck: China's Quest to Engineer the Future Mr Wang points out that the U.S. is run mostly by lawyers, a group that is more prone to arguing and obstructing progress, they are by the nature of their business trained to engage in the adversarial process, unlike engineers who are more likely to focus on building and solving problems. Don’t get me wrong, China has its fair share of issues, and I prefer to be an American, but it seems like we waste so much time, energy, and money on pointing the finger at the other party, which gives the media more fuel to intensify the drama and create more anxiety over uncertainty, which continues to divide our country.  

In general, Markets tend to overlook brief shutdowns, as they rarely affect corporate earnings. However, longer or repeated shutdowns can reduce confidence and cause investors to flock toward safe-haven assets. We experienced this in 2018-2019 when the government was shut down for 35 days and the S&P reacted with a 13% correction. From an economic perspective, we will probably shave a few billion off of GDP depending on the length of the shutdown.
In addition, a shutdown could reduce confidence and cause global investors to continue reallocating money away from the U.S. With market valuations stretched the equities market will be significantly more sensitive to changes in the economy. 
We expect to see a flight to safety, and that may be the beginning of an overdue correction with stocks prices stretched to ridiculous levels. Keep in mind a correction is not a recession.
So, what’s all the fuss about? 
The federal budget has two main parts: mandatory spending (which covers programs like Social Security, Medicare, & Medicaid that are funded automatically by existing laws and don’t depend on the annual budget process), and discretionary spending (about one-quarter of the budget, funded through 12 appropriations bills each year). These bills cover everything from Defense (which makes up almost half of discretionary spending) to Agriculture, Education, and Transportation. If Congress fails to pass them—or a temporary stopgap—funding lapses and a government shutdown occurs.

It seems like the major issue with this shutdown centers around the subsidies to the Affordable Care Act. The core dispute is over what conditions should be attached to short-term funding: Democrats insist any stopgap include maintaining Affordable Care Act premium tax credits and averting Medicaid and other health program cuts, while Republicans push for lower overall spending levels and rescissions, including limits on health subsidies and some foreign aid, before agreeing to reopen the government. 

But wait, I just said Medicaid was part of the mandatory spending. Medicaid is primarily a mandatory spending program. It is a major entitlement program, meaning its spending is governed by existing law and is not subject to the annual appropriations process in the same way as discretionary spending. The government shutdown did not happen because Medicaid itself became discretionary spending. The core of the most recent shutdown fight involved health care, but the conflict centered on other funding and legislative issues related to health care that were attached to the discretionary spending bill that Congress failed to pass. Confusing, isn’t it. 

So here is what we found out about why Medicaid was a major issue in the shutdown, even though it's mandatory spending:

1. The Real Dispute: 

Policy and Funding Attached to the Spending Bill
The immediate cause of a government shutdown is the failure of Congress to pass a law—either a continuing resolution (CR) or a full set of appropriations bills—to fund discretionary federal programs. In the most recent shutdown, the budget fight revolved around two major, contentious health care issues that one party was trying to include (or remove) from the must-pass funding bill:
Affordable Care Act (ACA) Subsidies: The most pressing issue was the expiration of enhanced premium tax credits that make health insurance more affordable for millions of people who purchase plans through the ACA Marketplace. Extending these subsidies required a legislative action that Democrats were demanding be included in the funding bill.

Proposed Medicaid Cuts: Democrats were also demanding a reversal of proposed future cuts to Medicaid and other social programs that were contained in a separate, previously passed legislative package. These cuts were scheduled to take effect in the coming years and would have affected the mandatory Medicaid program.

The actual fight is about a completely separate law that was passed earlier in the year (often referred to as the "Big Beautiful Bill" or "Big Ugly Law" depending on your political point of view), which contained massive future cuts to Medicaid.
Democrats demanded that a provision be added to the must-pass government funding bill (the Continuing Resolution or CR) that would reverse these cuts before they went into effect.

The key provisions they were fighting over are:
Medicaid Policy Issue Impact of the Current Law (that Democrats wanted to reverse): Work Requirements. The law included new, stringent work or community service requirements for many able adult Medicaid recipients. The government does not want free loaders to have coverage.

The Congressional Budget Office (CBO) estimated that the combined changes from this law, including the new work requirements and other eligibility restrictions, would cause millions of people to lose Medicaid coverage over the next decade. 
The new law restricts the eligibility of certain categories of lawfully present immigrants (such as refugees and asylees) for Medicaid coverage. Emergency Medicaid Reimbursement The law reduces the federal reimbursement that hospitals receive for providing emergency care (which they are legally mandated to do) to people who are otherwise low-income but do not have an eligible immigration status.

By attempting to attach a provision to repeal these future Medicaid cuts to the discretionary spending bill (the one that causes the shutdown), Democrats used the shutdown deadline as leverage to force a legislative change to the mandatory program.

In short, America has two major issues: one is that the country has a tremendous debt issue, and this concerns many people in the financial community. We should not be so arrogant as to think that we are invincible. If we push the limits of the envelope too far, it will be more painful than these shutdowns. The 2nd issue is that the Affordable Care Act does not work. The cost of coverage for working families that are not eligible for subsidies is astronomical. In New York, the premium for a family with a high-deductible plan is over $5,000/month, that is $60K a year before out-of-pocket expenses. This is not exactly affordable, especially to the middle class. The government cannot afford to keep giving money away because when the dollar collapses. Healthcare coverage will be the least of our problems.  
 

The Week Ahead 

Historically, U.S. government shutdowns have not had a significant impact on the economy, and any lost activity is typically recovered fairly quickly. However, the delayed publication of key reports could impact both investors and FOMC policymakers. If the shutdown lasts a few weeks or more, important releases like CPI, PPI, retail sales, and housing data may not be published. 

The markets may react positively to no data, however, with the Fed having emphasized data dependence for so long and heading into its next rate decision at month-end, investors may need to brace for rising volatility if the interest rate path becomes less clear. Additionally, tariff concerns persist with new levies announced last week on heavy-duty trucks, kitchen and bathroom materials, and home furniture.

On this week’s economic calendar, reports that may be impacted by the shutdown include the U.S. trade balance and consumer credit figures, along with weekly unemployment claims. Treasury auctions have typically not been postponed by prior shutdowns, and there are 10- and 30-year sales scheduled for Wednesday and Thursday. Minutes from the last FOMC meeting also arrive mid-week, while Friday brings the University of Michigan’s preliminary consumer sentiment reading and inflation expectations for September.

Third-quarter earnings season won’t begin in earnest until the week of October 13, but reports on Thursday morning from Delta Airlines and Pepsico may provide insight into consumer spending trends. Overseas, most of the economic news will flow from Europe with several low to medium-impact reports. German factory orders and industrial production, along with EU retail sales and investor confidence, are on the docket. Minutes from the last ECB and Bank of England meetings round out the calendar. The Japanese yen rallied last week amid rate hike speculation, but the outcome of the ruling party’s leadership election over the past weekend is crucial as the two candidates have opposing views on fiscal and monetary policy