Economic and Market Cycle Score Introduction: October 2025
Why This Matters
If you've ever felt like financial markets are a mystery, where the news is either celebrating record highs or predicting doom, you're not alone. The challenge isn't just market volatility; it's knowing whether we're navigating normal turbulence or heading into something more significant.
Most investors (and frankly, many advisors) react to markets rather than monitor them systematically. When stocks drop 10%, panic sets in. When they rally 20%, euphoria takes over. But markets move in cycles, and understanding where we are in those cycles can help us make more informed decisions about risk management and opportunity.
That's why we've developed what we call our Market Cycle Score Calculator—a systematic way to cut through the noise and assess the actual economic and market environment we're operating in.
What We're Monitoring
Think of this as a comprehensive health check for the investment environment. Rather than relying on gut feelings or the latest headlines, we track 15 specific data points across five categories:
Economic Growth (30% of the score)
We monitor manufacturing activity (ISM PMI), GDP growth trends, and unemployment changes. These tell us whether the economy is expanding or contracting and at what pace.
Financial Conditions (25% of the score)
We watch the yield curve (the relationship between short and long-term interest rates), credit spreads (how much extra yield risky borrowers must pay), and Federal Reserve policy. These indicators reveal whether money is flowing freely or tightening up.
Inflation Pressures (15% of the score)
Core inflation and wage growth data help us understand whether price pressures are building, stable, or cooling—which directly impacts Fed decisions and purchasing power.
Market Internals (15% of the score)
We look at market volatility (VIX) and breadth (how many stocks are participating in rallies). Are we seeing broad-based strength or just a few stocks carrying the market?
Leading Indicators (10% of the score)
Conference Board's Leading Economic Index and consumer confidence surveys help us anticipate what might be coming rather than just reacting to what's already happened.
Valuation (10% of the score)
Forward P/E ratios and investor sentiment (bull/bear surveys) tell us whether markets are priced for perfection or offering reasonable entry points.
Each data point gets scored, weighted by importance, and combined into a single number between -50 (extreme risk-off environment) and +50 (extreme risk-on environment). Zero represents neutral conditions.
Where We Are Now: October 2025
Current Market Cycle Score: -1.8 (Neutral, Borderline Negative)
Let's be direct about what we're seeing.
After 15 months of gradual decline from July 2024's peak reading of +26.2, we've crossed into slightly negative territory for the first time since the post-COVID recovery. We're not in crisis mode—the score sits in neutral range—but the trend and the mix of signals warrant attention.
Here's what's creating this environment:
Manufacturing has entered contraction. The ISM Manufacturing Index dropped below 50 (currently 49.1), which is the technical threshold that separates expansion from contraction. This isn't catastrophic, but it's typically an early warning that broader economic slowing may follow in 3-6 months.
Leading indicators are weakening. The Conference Board's Leading Economic Index has declined for three consecutive months, and consumer confidence has dipped below 100. These aren't screaming alarms, but they're yellow lights worth watching.
Inflation is proving stickier than expected. Core inflation remains at 3.1%—above the Fed's 2% target—while wage growth has slowed to just 0.7%. That's a problematic combination: prices rising faster than paychecks, which squeezes purchasing power and constrains the Fed's ability to cut rates if the economy weakens further.
Markets are priced for optimism that the data doesn't fully support. Stock valuations remain elevated (forward P/E at 22.8), and investor sentiment surveys show more bulls than bears, even as economic fundamentals soften. This disconnect creates vulnerability if conditions deteriorate.
The good news? Financial conditions aren't severely restrictive, market volatility remains low, and credit markets are functioning normally. GDP growth is still positive. We're not in a recession—we're in an environment where the expansion is showing fatigue and the path forward is less certain than it was a year ago.
A note on the government shutdown: As we write this on October 15th, the federal government remains shut down. This means some of the economic data we normally track—unemployment reports, retail sales, certain GDP components—will be delayed or unavailable in coming months. We're adapting by relying more heavily on private sector data sources (like ISM surveys and payroll processors) and market-based indicators that update regardless of government operations. The shutdown doesn't change the underlying economy, but it does create a temporary fog that makes navigation slightly more challenging. This is precisely the kind of environment where systematic monitoring and experienced judgment matter most.
What This Means for You
Environments like this, where the data is mixed, the trend is uncertain, and outside noise is high, are exactly where systematic thinking and experienced guidance create the most value.
This is NOT a time to panic. It's also not a time to ignore what's happening and hope for the best. It's a time to be thoughtful, deliberate, and clear-eyed about both risks and opportunities.
Here's our approach:
For clients in or near retirement, we're reviewing income strategies and ensuring withdrawal plans account for potentially choppier markets ahead. A -1.8 score doesn't mean "sell everything," but it does mean ensuring you have adequate liquidity and aren't forced to sell into weakness if volatility increases.
For clients in accumulation phase with longer time horizons, this environment presents different considerations. Market pullbacks create opportunities to add to positions at better valuations—but only if your risk tolerance and time horizon support staying the course when things get uncomfortable.
For clients with specific goals and deadlines (funding education, purchasing property, starting a business), the current environment influences how we position those dedicated funds. Money needed in 12-18 months should be managed very differently than money needed in 10 years, and a weakening economic backdrop makes that distinction more important.
What makes this environment challenging—and where we add value—is navigating the contradictions:
- Markets remain near highs while economic indicators soften
- Inflation persists while growth slows (limiting Fed's options)
- Data is becoming less reliable due to government disruptions
- Headlines alternate between "everything is fine" and "recession is imminent"
This is confusing by design. Markets don't send clear signals. Economic transitions are messy. Perfect information doesn't exist.
But confusion doesn't mean paralysis. We have frameworks, data, experience, and—most importantly—we know YOUR specific situation, timeline, and comfort with uncertainty. That combination is how we make sound decisions even when the environment is murky.
By: Erin Ragsdale, WMCP, Vice President, Wealth Advisor at UWM