January Economic Update

Market Summary

December closed out a volatile finish to 2025, with U.S. equities digesting mixed macro data, shifting Federal Reserve policy expectations, and geopolitical and political headlines. Investors wrestled with late-cycle growth signals, AI sector leadership pressures, and renewed rate-cut speculation into year-end. For the month, the S&P 500 ended up closing nearly flat with a small loss of -0.05%, the Nasdaq 100 closed lower at -0.73%, and the Russell 2000 lagged the major indices losing -0.76%. (1)

Labor Market

The U.S. labor market continued to show signs of cooling. Private hiring remained weak in early December, and while December employment was forecast to show moderate gains with the unemployment rate slightly lower, consensus reflected a slower pace of job creation compared to earlier 2025. (2)

Inflation & Services Activity

November inflation data revealed a cooling trend, with CPI and PCE readings moderating more than expected, providing relief for markets and supporting rate-cut expectations. At month-end, services sector activity strengthened, with ISM’s nonmanufacturing index rising above expectations, suggesting resilience in the broader economy. (3)

Federal Reserve & Policy Commentary

At its December meeting on December 9–10, the Federal Reserve delivered the third rate cut of 2025, trimming the federal funds target by 25 basis points to 3.50–3.75%, the lowest level since 2022. The decision was widely anticipated, and Chair Jerome Powell emphasized that while the Fed expects further easing in 2026, the path remains uncertain and without a “risk-free” trajectory. The FOMC projections signaled only one additional rate cut next year, underscoring the Committee’s caution around inflation and labor market dynamics. Dissent within the Fed was notable, with several members voting against the reduction. (4)

Market pricing shifted during the month as softer inflation and labor data strengthened the odds of future easing, yet resilient pockets in services and employment tempered expectations for aggressive cuts in early 2026.

Political & Policy Impacts

Political developments continued to influence market sentiment. Bipartisan progress on a major housing affordability and infrastructure package offered a potential catalyst for sectors tied to construction and regional banking, while tariff policy and trade ambiguity remained an undercurrent shaping corporate cost structures and inflationary pressure.

Looking Forward…

Investors head into 2026 with mixed signals: softening labor metrics and easing inflation favor continued Fed accommodation, yet pockets of economic resilience and persistent price pressures temper expectations for rapid rate cuts. Market leadership trends — especially within tech and AI sectors — will be crucial in determining the breadth of gains early in the year. Volatility is expected to remain elevated as markets balance growth expectations, earnings trajectories, and shifting monetary policy signals.

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Monthly Financial Tip:

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Citations:

1. Schwab, Dec 31, 2025

2. Investopedia, Jan 07, 2026

3. Financial Content, Dec 18, 2025

4. RBC, Dec 10, 2025

Disclaimers:

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.