Newsletter

Economy, Stocks and Bonds

December 2025

The government shutdown ended on November 15th after 43 days, making it the longest shutdown in US history. During that time, many economic reports that are crucial to understanding the conditions of demand, inflation, and the labor market were paused and unavailable. This means that business leaders, investors, bankers, and monetary policymakers were in the position of making decisions with even less information than usually available. 

It is worth noting that some of those paused reports may never be released, which raises suspicions that signs of inflation or relative strength in the labor market may have been overlooked as the Fed cut rates at last month’s meeting. If this turns out to have been the case, the current monetary policy stance and expected glidepath for the overnight rate could be considered inappropriate and inflationary. The back data that has been released so far has been mixed, although it remains to be seen whether the dovish policy stance at the Fed has been optimal. 

What does all this mean for investors?

Markets tend to “climb a wall of worry.” This old saying alludes to the fact that market prices move independently of logic at times, and this appears to be one of them. There is much risk in the marketplace, including levered bets on artificial intelligence, Jamie Dimon’s (correct) statement about there likely being more “cockroaches” in the private lending markets, and the fact that the Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla) make up ~36% of the S&P 500. Nevertheless, the index has continued to climb back from recent lows and is currently trading at 6824, close to its all-time high as of this writing (December 2). 

Investors cannot ignore the market, but we are advising a cautious approach. The fact is that volatility is inevitably going to return, and because of what we see as inappropriate monetary policy being conducted by the Federal Reserve, we would expect that it will be exaggerated due to a higher inflation environment. It is also worth noting that December has traditionally been a good month for returns, with an average of ~1% for the month. Going forward, many analysts suggest that international developed markets are likely to outpace the returns of US large cap for the first time in the past decade or more. We agree and have added to this exposure in managed accounts.

The yield curve has steepened since the most recent rate cutting cycle began, with maturities under one year and out to 7 falling slightly and rates further out rising slightly. This reflects inflation expectations from bond investors. Corporate bond yields are down slightly inside 10 years, with the 5-yr A+ yield at ~4.23% and the 10-year yield at ~4.86%. These are still good rates for fixed income investors and those looking to diversify away equity volatility risk in their portfolio.