Short-term policy uncertainty led to volatility and declines in small-cap stocks, crypto, and non-profitable tech names.
Those calling for a rate cut in December can point to additional data to support one, with weakness in jobs and manufacturing.
Lower interest rates and our expectation of an improving economy in 2026 can be supportive of stocks in the US.
A well-known senior economics TV reporter recently said that he wishes we could get back to a place where Federal Reserve (Fed) members didn’t talk as much. He even went so far as to say that he wishes we didn’t know their names. They were never intended to be celebrities. His comments were regarding the whiplash Fed speakers have likely been providing to investors.
Consider the past couple of months: In October, Fed Chairman Jerome Powell mentioned dissent within the Fed and stated that a December cut was “far from a foregone conclusion.”1 Then, in mid-November, Raphael Bostic, President and CEO of the Federal Reserve Bank of Atlanta, advocated for a “higher for longer” stance, reinforcing the idea that restrictive policy might persist.2 Yet by late November, John Williams, President and CEO of the Federal Reserve Bank of New York, suggested there was room to lower borrowing costs “in the near term.”3 At that same time, Christopher Waller, a member of the Board of Governors, signaled strong dovish leanings.4 Markets went from pricing in a near-certain probability of a rate cut to no probability of a cut, and then back to nearly 100% odds.5 Clear enough?
This short-term policy uncertainty has been enough to bring volatility to markets, with downturns in small-cap stocks, crypto, and non-profitable tech names, to cite a few examples.6 For investors, the constant shifts in tone have made positioning more challenging, while the renewed volatility created a buzz of a bubble in the artificial intelligence (AI)-related stocks.
Increased speculation that a former advisor of President Trump, Kevin Hassett, will be named the next Fed Chair is adding a further layer of intrigue about the future of its independence. If Fed independence is seriously challenged, we’d expect long bond yields to rise. This isn’t happening yet, but it could well be an important story in 2026. We’ll watch it closely.
Chatter notwithstanding, those calling for a rate cut in December can point to additional data to support it. For example, last week’s ADP National Employment Report showed a 32,000 decline in private-sector jobs, signaling labor market softness.7 Surveys of global purchasing managers in the manufacturing sector also demonstrated further weakness.8 At the same time, inflation expectations have been declining.9 That’s right, declining!
Lower policy rates are not a magic elixir, especially if the yield curve steepens, but we think there’s enough in the recent moves to help some of the more rate-sensitive parts of the economy. Falling policy rates mean cash and money market fund returns are falling. That increases the opportunity cost of holding cash compared to other assets. While we might personally think that cash should migrate to other assets, history suggests that this rarely happens even as rates start to come down.
Lower rates, combined with our expectation of improving economic activity in 2026, could provide a supportive backdrop for stocks. This could lead to a further broadening of market participation in the US.
Date |
Region |
Event |
Why it matters |
|---|---|---|---|
Dec. 9 |
Japan |
Machine Tool Orders (preliminary) |
Indicator of manufacturing investment and industrial activity |
Dec. 10 |
US |
Employment Cost Index (Q3) |
Measures labor costs, influencing inflation and Fed policy decisions |
|
US |
Federal Open Market Committee (FOMC) meeting and rate decision |
Critical for monetary policy direction and market expectations |
|
US |
US Treasury statement (Nov.) |
Provides insight into government finances and fiscal stance |
|
Canada |
Bank of Canada policy meeting |
Impacts the Canadian dollar and signals Canada's monetary policy stance |
Dec. 11 |
Japan |
Industrial production (Oct. final) |
Key gauge of manufacturing sector strength and economic momentum |
Dec. 12 |
UK |
Industrial production (Oct.) |
Measures output in manufacturing, mining, and utilities, critical for gross domestic product (GDP) |
|
UK |
Trade balance (Oct.) |
Indicates trade flows and competitiveness, impacting currency and growth |
|
Canada |
Wholesale trade (Oct.) |
Reflects business activity and supply chain health |
|
Canada |
Building permits (Oct.) |
Leading indicator for construction and housing market trends |
|
Canada |
Capacity utilization (Q3) |
Shows efficiency and potential inflationary pressures in the economy |
Following the US-Israel strikes on Iran, we offer four possible scenarios for what we could face in the coming weeks and explore the possible reaction of various asset classes.
Markets largely expected last week’s tariff decision and the flare-up in US-Iran tensions, while new US economic data was weaker than anticipated.
On one side, weaker growth makes Fed easing more likely. On the other side, stronger growth supports an intact business cycle. Either can be supportive of markets if inflation stays contained.
Important information
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Image: LD/ Getty
Some references are US-specific and may not apply to Canada.
All figures are in US dollars unless otherwise stated.
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The ADP National Employment Report measures nonfarm private payrolls. It is published monthly in collaboration with Moody’s Analytics.
Dovish refers to an economic outlook that generally supports low interest rates as a means of encouraging growth within the economy.
The Employment Cost Index details changes in US businesses’ cost of labor. It is prepared quarterly by the Bureau of Labor Statistics. An investment cannot be made into an index.
Fed funds futures are financial contracts that represent the market’s opinion of where the federal funds rate will be at a specified point in the future. The federal funds rate is the rate at which banks lend balances to each other overnight.
The Federal Open Market Committee (FOMC) is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.
Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.
The Goldman Sachs Non-Profitable Technology Index is a proprietary, informal basket of high-growth technology and e-commerce companies that have reported negative earnings, according to their as-reported accounting metrics.
Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified period of time.
Inflation is the rate at which the general price level for goods and services is increasing.
Leverage measures a company’s total debt relative to the company’s book value.
A policy rate is the rate used by central banks to implement or signal their monetary policy stance.
Purchasing Managers’ Indexes (PMI) are based on monthly surveys of companies worldwide and gauge business conditions within the manufacturing and services sectors.
The Russell 2000® Index measures the performance of small-capitalization stocks and is a trademark/service mark of the Frank Russell Co.®
Stocks of small- and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.
A spot price is the current market price at which an asset is bought or sold for immediate payment and delivery.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic, and political conditions.
The yield curve plots interest rates at a set point of time for bonds of equal credit quality but differing maturity dates in order to project future interest rate changes and economic activity.
The opinions referenced above are those of the author as of Dec. 5, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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