On Our Guard

October 2, 2025

By Mark Oelschlager, CFA

​​​

On July 6, the Cleveland Guardians were one strike away from ending their 9-game losing streak when their closer Emmanuel Clase uncorked a wild pitch that allowed the tying run to score for their American League Central-rival Detroit Tigers.  The Tigers went on to win the game in extra innings, sending Cleveland to its 10th straight loss and extending Detroit’s lead over the Guards to 15 ½ games.  The game seemed to be a fitting coup de grace in a competition that had essentially already been decided.  No team in the history of major league baseball – a history that goes back at least 120 years, depending on how it’s defined – had ever overcome such a large deficit to win a division or league crown.

 

The team formerly known as the Indians started playing better but on September 4 sat a game below .500 and 11 games behind their neighbors across Lake Erie.  The team then reeled off 15 wins in 16 games while Detroit was floundering, and by season’s end the “Windians” had completed their miracle comeback and become champions of the AL Central.

 

The stock market continued its remarkable comeback from the April correction, posting another quarter of impressive gains.  The labor market showed some weakness with payroll growth slowing, but investors took it as a positive, as it prompted the Federal Reserve (Fed) to adopt a more dovish stance on monetary policy.  The Fed Funds rate was lowered by a quarter point, the first cut in about a year, and the central bank also indicated a bias toward two more cuts before the end of the year.

 

This dovish stance by the Fed is a bit hard to understand given the totality of the evidence.  Core inflation remains closer to 3% than to the Fed’s target of 2%, with more upward pressure on prices likely to come as the effects of tariffs are passed through and as labor costs rise due to a shrinking pool of immigrants (half of US labor supply growth this decade has come from outside our borders).  Stocks are at all-time highs, unemployment is still low at 4.3%, the dollar has weakened considerably this year, credit spreads are low, and gold has been on a massive run, doubling in value over the last two years.  In effect, financial conditions are fairly loose, not tight.  The Fed has a “dual mandate,” meaning it is charged with managing both inflation and unemployment, and it is supposed to balance the risks associated with both.  But right now it seems to care more about the latter than the former.

 

It is difficult to know how much of this is simply a reflection of Chair Powell’s natural dovishness and how much is a function of the political pressure that he and the Federal Open Market Committee feel.  The political pressure on the Fed is ever-present but is at a higher level these days given the criticism from President Trump and his overt attempts to alter the composition of the Federal Reserve Board with members more sympathetic to his view.

 

In an unprecedented move, the President appointed the chair of his Council of Economic Advisers, Stephen Miran, to replace a Fed board member who stepped down.  Hours later Miran was the only committee member to vote for a rate cut of ½%.  Mr. Trump has also been working to oust a sitting board member who was accused of submitting a fraudulent mortgage application.  These moves threaten to usher in a politicized Fed.  It is widely acknowledged and understood that the Fed’s independence is critical.  A body that manages the dollar free of political influence engenders confidence in not only the currency but the economy as well.  Once the Fed becomes another political tool, it opens the door to manipulation that could have severe long-term consequences.  We are hard pressed to think of a more important element to an economy than a sound currency.  It forms the basis of commerce and facilitates saving; nobody would want to save in a currency that is rapidly depreciating.  Yet we have been tempting fate.  First there was the gargantuan fiscal stimulus earlier this decade which dramatically raised the money supply and caused our national debt to spike.  That was followed by a Fed that was slow to raise rates despite accelerating inflation.  Today’s Fed remains dovish in the face of loose conditions, and we now have Fed independence under attack.  All of these erode the value of the currency.

 

One of the reasons President Trump wants the Fed to lower interest rates is to reduce the cost of government borrowing, which trims the federal budget deficit.  But the Fed controls only short-term rates, and only so much of the US’s debt is at this duration, so Fed rate cuts have little direct impact on the country’s borrowing costs.  In fact, such cuts, if they are perceived by the market as being inflationary, may cause long-term rates to rise rather than fall, costing the federal government more when it issues such bonds.

 

The dovish shift in the Fed’s stance in the summer seems to have rekindled the speculative fervor in the market.  Since the end of July, a basket of unprofitable tech companies that UBS tracks rallied 21% in less than two months.  At the same time, the profitable tech companies gained only about 2%.  This is reminiscent of what happened in late 2021 – and reversed in 2022.  Additionally, the trend of companies transforming themselves into cryptocurrency treasury entities continued in the third quarter.  In one example, a company made the transition and saw its stock rise to $300 per share, just months after it had sold stock to the public for less than a dollar per share.  When organizations can create billions of dollars in “value” out of thin air like this, it leads us to conclude that something isn’t quite right in the capital markets and that we should remain on our guard.

 

Artificial intelligence continues to drive much of the economy and market.  We noted in our last commentary that overinvestment in AI was a risk, and now a growing concern is the increasing circularity in the industry.  There are plenty of examples in recent months of Company A investing in Company B, which then allows Company B to purchase more products from Company A – or similar arrangements.  Some of these highly valued business customers lack a basic revenue model but are able to sustain themselves through the generous capital markets of today.  These are all things we remember in the late 1990s with the telecom build-out.  The circularity is self-perpetuating but one day will reverse, and when it does it will be painful for a lot of investors.

 

We read an interesting report by Empirical Research Partners detailing the changing makeup of the participants in the stock market.  Retail investors, armed with apps that make it easy to trade, now represent over a third of trading volume.  Institutional high-frequency traders make up another quarter.  The share of market activity accounted for by these two quick-trigger groups has doubled from 15 years ago.  From whom have these players taken share?  Traditional investors such as us.  We believe that the diminishing number of market players employing fundamental investing gives those of us still practicing it a greater edge.  While the rapid traders generally focus on momentum strategies, and there is a self-perpetuating element to such an approach - especially when it is widely adopted - in the end, it is the fundamentals of the businesses that matter and ultimately determine performance.

​

Mark Oelschlager, CFA  

Oelschlager Investments ​​