Economic Update 12-1-2025

On a short holiday week, economic data included gains in retail sales and durable goods orders, as well as higher producer price readings, decelerating home prices, and continued weak consumer confidence. However, the recent government reopening meant some data released was fairly stale at this point.

Equities rebounded into gains last week, led by the U.S. over international. Bonds also fared well as interest rates fell back amidst Fed member dovishness. Commodities also saw gains, mostly in metals.

U.S. stocks recovered back into positive territory last week, following negative performance the week prior, and wrapping up a more volatile November where the S&P 500 only gained 0.2%, but continued a string of seven straight positive months. Stocks gained sharply early in the week as odds of a December Fed rate cut were further absorbed by markets. These odds have been largely driven by dovish or hawkish comments from various FOMC members, with the voting odds now tilted again toward easing. The maxim of “Don’t Fight the Fed” can be powerful when markets are in the midst of rate cuts.

Every sector saw positive results last week, led by over-5% gains in communications (Meta and Alphabet) and consumer discretionary (Tesla and Amazon), followed by technology. Laggards included energy and more defensive areas of health care and consumer staples, which still saw nearly 2% gains. Real estate also gained just under 2% for the week. Within the closely-watched AI segment of technology, the prior week’s announcement by Google that it’s developed a fast and less energy-intensive in-house chip specifically for AI boosted that company’s sentiment, while it caused bullishness for Nvidia to waver a bit (whose chips remain the industry standard for general AI purposes). The discussion about the two continued throughout the week.

Analyst estimates for 2026 are beginning to come out, and unsurprisingly, they tend to congregate around the range of an 8% increase (not far from the long-term average return of the S&P 500). However, there are always a variety of potential concerns to get past, with the current batch including inflation (and how the Fed handles it, either through slowing rate cuts or even hikes in the worst case as the Fed funds futures markets hint at), AI capex (if the acceleration in current spending trends slow), a deteriorating labor market/rising unemployment rate, and a flare up again in trade concerns (notably with China).

Foreign stocks slightly underperformed U.S. last week, despite the tailwind of a weaker U.S. dollar. Results were largely similar, with Europe slightly outperforming other segments, as inflation reports in Europe came in cooler than expected. Within EM, Brazil, Taiwan, and Mexico outperformed other groups. Plans for a potential Ukraine-Russia peace agreement continued to lie in the background, although little new has been proposed, with potential for a deal remaining lukewarm.

Bonds gained as interest rates ticked down across the U.S. Treasury yield curve, as investors interpreted Fed comments more dovishly in regard to future rate cuts. Investment-grade, high yield, and floating rate corporates all outperformed Treasuries slightly for the week, while foreign bonds generally benefited from a weaker U.S. dollar.

Commodities saw gains in all categories last week, led by precious metals and industrial metals. Crude oil rose 2% for the week to $59/barrel, as the trading range has fallen to around $55-65 from a higher range during the summer. Supplies remain high, with demand not quite keeping up to offset it.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.