The markets kicked off December with more gains, fueled by the high likelihood of another Fed rate cut next week. Growth, cyclicals, and small-caps continue to lead the market, which is often seen in periods where investors feel confident about the trajectory of the economy. Subdued volatility continues to confirm risk-on sentiment, but the latest labor market data showed further weakness in November. This is likely to remain a key theme heading into 2026.
Tip of the Week
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Market Moves
Weekly Market Snapshot:
- S&P 500: +0.3% – rate cut optimism and seasonality keep pulling the indexes higher despite concerning data about jobs and consumer sentiment.
- Nasdaq 100: +0.9% – tech continues to lead in a sign that investors remain confident heading into the new year.
- Russell 2000: +0.8% – small-caps extend a relatively strong run since mid-November relative to the S&P 500 thanks in large part to rate cut optimism.
- VIX: 15.8 – few surprises in both earnings and economic data keep volatility levels well under control.
- Gold: -0.4% – the gold rally has stalled out for more than a month; investor flows continue moving back into equities and other risk assets.
- 10-Year Treasury Yield: 4.14% – the high likelihood of a rate hike in Japan this month helped to pull global yields higher as well.
Drivers:
After a choppy start to the week, stocks settled down following some reassuring services data, a cooler-than-expected read on inflation and a rebound in consumer confidence helped bring buyers back into the markets. Investors have mostly ignored the ADP private sector jobs data, which shows losses for the 4th time in the past six months.1 If this trend starts spilling over into the more widely-watched non-farm payroll numbers and unemployment rate, it could trigger more volatility for equity prices.
Economic Highlights
A couple of the notable themes that stood out this week:
Labor Market Stalls as ADP Reports Sharp Decline in Small Business Hiring and Rising Job Losses
ADP reported 32,000 jobs lost in the private sector in November.1 This continues a troubling trend going back to the beginning of summer where the labor market has stagnated and is showing signs of going backwards. Part of that is jobs lost to AI, which was expected, but that is still a relatively small percentage of the overall number. The 120,000 jobs lost from companies with 1-49 employees show the labor market shrinking in the economy’s core and negatively affecting a lot of the people on the bottom end of the K-shaped economy.
Source: Doubleline, ADP, Macrobond
High Rate Cut Odds Put Spotlight on Fed Dot Plot and Risks of Falling Real Incomes
The odds of a rate cut from the Fed next week have held steady around 87%.2 The Fed Dot Plot will be closely watched for the central bank’s expectations for rates, employment, and inflation. The latter could be particularly important. If the Fed plans for multiple rate cuts next year but sees no commensurate drop in inflation, real rates could start moving back towards zero. With so many households struggling with inflation and simply making ends meet, a decline in real incomes could be a tough sell.
Rising Annualized Inflation Could Complicate Fed Cuts
It’s an outdated figure, but anything that helps confirm that inflation is still under control is welcome news for the markets. The September PCE number, which is the Fed’s preferred measure of inflation, came in at 2.8% year-over-year, in line with expectations.3 Given that the reading is still in the 2’s and that it’s about 2-3 months old, the market mostly ignored it, but it does show a potentially troubling trend. The PCE annualized rate is up 0.5% since April and is now at its highest level since April 2024. That market is currently pricing in multiple Fed rate cuts over the next 12 months. A continued uptick in inflation is going to make it tough for the central bank to keep cutting rates with rising prices in the background.
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The Week Ahead
A few themes to watch next week:
In Summary
Investors are still in a good mood and that sentiment could carry into the new year. Seasonality this time of year usually features lower volatility and gently rising equity prices. The Fed outlook and delayed inflation readings could disrupt the narrative, but this is still looking like a period of relative steadiness for the markets.
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