Stocks Soar, Jobs Drop, Tariffs Feed Inflation: Is It The October Effect?

October 2025 is kicking off with a confusing mix of economic signals. Wall Street is rallying, and some analysts are betting on more interest rate cuts ahead. But beyond the markets, the picture looks less rosy: job growth is slipping, tariffs are driving up costs, and inflation is creeping higher. It’s a classic case of good headlines clashing with tough realities.

Before diving into what these shifts mean for your wallet, let’s take a quick look back at some of the major events that set the stage for today’s economy.

The October Effect

This month’s volatile financial history has caused some to refer to it as the “October Effect.” Here is a brief recap of some events:

The Panic of 1907. A collapse of the copper market led to a run on banks. One of the outcomes of that event was the creation of the Federal Reserve Bank (the Fed).
The Wall Street Crash of 1929. Panic selling on October 24 (Black Thursday) was halted briefly but resumed on October 29 (Black Tuesday), leading to a total crash.
Black Monday. The largest percentage drop in the Dow Jones Industrial Average occurred on October 19, 1987. That day, the market sank 22.6%. The previous record was Black Tuesday’s 12% drop.
Global Financial Crisis of 2008. October was one of the worst months of this financial upheaval.

Before you buy into the October Effect, it is important to note that September has witnessed more negative returns in the S&P 500.

Jobs Continue Decline

On a normal Friday in early October, members of the Federal Reserve (Fed) would be poring over a just-released jobs report for information that might influence their decision on interest rates. However, this Friday in early October is not normal.

That is because the government continues its shutdown that began at 12:01 a.m. Wednesday. That means the Bureau of Labor Statistics (BLS) can not publish its jobs report. However, policymakers are not without information on the job market.

Private sector employers lost 32,000 jobs in September, according to the ADP National Employment Report issued the day the government shutdown began. On the bright side, those who still had jobs were making 4.5% more than at the same time last year.

ADP offers payroll, tax, and other business services.

The job loss is the largest since March 2023 and came as a surprise to economists surveyed by Dow Jones. They had expected the economy to add 45,000 jobs last month. Furthermore, the August ADP report, which initially showed a gain of 54,000 jobs, was revised downward to indicate a 3,000 job loss.

“Despite the strong economic growth we saw in the second quarter, this month’s release further validates what we’ve been seeing in the labor market, that U.S. employers have been cautious with hiring,” said Dr. Nela Richardson, chief economist at ADP.

Companies with fewer than 500 employees lost the most workers – especially in the Midwest. Some of the decline could be expected. The leisure and hospitality sectors, for example, shed 19,000 jobs. Such a decline usually follows the end of the Summer vacation season. However, business and professional services dropped 13,000 jobs.

Jobs and Interest Rates

The monthly jobs report from the BLS is a significant gauge of the economy’s health and a tool the Fed uses to make policy. The Fed cut interest rates a quarter of a percent last month. That move was partly in response to weak jobs numbers for July and downward revisions for previous months.

The next Fed meeting will take place on October 29. If the shutdown is not resolved by then, the central bank may have to rely on the ADP report for jobs data.

Many economists had expected another quarter-point rate cut this month.

Rate Cut and Market Risk

If the Fed cuts rates later this month, it could contribute to one of two scenarios. It could add fuel to the accelerating stock markets, or it could stoke the fires of inflation and fears of a market bubble.

The pitfalls of a market bubble are straightforward. In that case, overvalued prices fall quickly, resulting in investor losses that can take a considerable amount of time to recoup.

Rising inflation also poses a risk to the markets, as investors may start dumping stocks to invest in the bond market.

A time-honored measure of the economy’s health is the 10-year treasury yield. It is another indicator watched by the Fed.

A rising yield could indicate that the economy is overheating. That occurs when growth happens too quickly, leading to a higher demand for goods than the supply can handle. The result is higher inflation.

As a result, the Fed might raise rates if the 10-year Treasury yield rises. Conversely, the bank may lower rates if yields decline.

Tariffs Expected to Push Prices Higher

One sure sign of inflation is rising prices, and a new KPMG report out yesterday reveals that most large businesses either have or plan to increase prices.

The impetus for price hikes? Tariffs.

Of 300 executives interviewed, 44% have already raised prices due to the increased costs of tariffs. The survey was limited to companies with annual revenues exceeding $1 billion.

In the next six months, 42% of those companies plan to raise prices as much as 5%. An additional 29% say they will increase prices from six to 15%.

Executives told KPMG that the price hikes were necessary to generate a profit.

In that regard, 39% of businesses have already seen their gross margins shrink. That is not surprising, considering that 35% of companies report a decline in sales, while another 31% say sales have been deferred.

KPMG and ADP Surveys Jive

Both surveys from KPMG and ADP reflect a declining job market. However, companies in the KPMG study attributed the blame to tariffs.

KPMG found that 38% of the companies it surveyed have paused hiring due to tariffs. Another 29% of companies have reduced their workforce by up to 5%, while 15% have cut six to 10% of employees.

Meanwhile, 13% of companies have relocated production to the United States, and 22% have hired new staff to manage tariff complexities.

The majority of companies, 60%, are training existing staff to “manage the increased workload and complexity caused by new tariff policies.”