Economic Commentary

Volatility picked up in November as the government shutdown weighed on consumption. Rate cut expectations swung significantly as investors attempted to look through the fog created by delayed official government data. Speculative assets like bitcoin suffered large losses. Investors focused on earnings to assess the true impact of AI, while sector leadership rotated away from the technology giants that have dominated recent returns. Despite the retrenchment, US large cap equities are still on track to generate double digit returns in 2025.

The Government Reopens

On November 12, the federal government reopened, ending the longest shutdown in history at 43 days. The deal to reopen the government included backpay for all furloughed workers. However, the deal did not include full fiscal year funding for many agencies and the continuing resolution will expire January 30, 2026, creating yet another fiscal cliff to manage. The Congressional Budget Office estimated the impact of shutdowns on the economy and forecast that a 6-8 week shutdown would have a negative impact of 1.5%-2.0% of real GDP in the current quarter, but that most of the negative effects would reverse in subsequent quarters once the government reopened. One detrimental impact for investors was the loss of government-produced economic data that is used to help make informed decisions. Some of the data will still be released with a delay, other data points will not.

Market Drivers

After a delay, the Bureau of Labor Statistics released September’s employment report which showed that U.S. job growth picked up in September and the unemployment rate rose 0.1%. Nonfarm payrolls increased 119K in September (vs. consensus of +51K) and the jobless rate rose to 4.4% from 4.3% a month earlier. While a full October jobs report will not be produced, a portion of the data will be released alongside November’s report on December 16. As a result, Fed policymakers will not have the benefit of additional labor market data before their next meeting on December 10.

Expectations for the December 10 Fed meeting swung significantly throughout November. In late October, a December cut was considered a near certainty, positive incoming data from surveys and quarterly earnings reports pushed those odds to just 30% in mid-November before sentiment reversed on public comments from FOMC members and odds moved back to nearly 100% by month end. This demonstrates the difficulty for investors operating in the fog created by the lack of government economic data. We expect that the Fed is likely to deliver another ‘hawkish cut’ in December, lowering the Federal Funds Rate range to 3.50-3.75% but communicating that future cuts will be data-dependent and emphasizing the need to bring inflation back to target.

While government data was delayed, S&P 500 earnings season occurred as scheduled. Overall, it has been a positive quarter for earnings, with 83% of reporting companies exceeding EPS expectations (above the 10-year average of 75%). Positive surprises were prevalent in the Health Care sector and stock prices followed. In November, Health Care was the best performing US sector with a notable rotation out of Information Technology and Consumer Discretionary sectors.

Looking ahead, tariffs will continue to be in the headlines. On November 5, the Supreme Court heard oral arguments from a lawsuit challenging many of the ‘reciprocal’ tariffs implemented by the International Emergency Economic Powers Act (IEEPA). In a nutshell, the Justices are determining whether IEEPA grants the President the authority to impose tariffs. The government argues that the power to “regulate” importation includes tariffs; the challengers argue that tariffs are a tax, a power exclusively reserved for Congress and that IEEPA does not explicitly authorize them. Prediction markets currently favor the challengers, with 75-80% odds of a SCOTUS ruling against the tariffs. Importers who have been paying these tariffs may be eligible for refunds. In the case of such a ruling, we would expect the administration to pursue other authorizing legislation to advance similar economic policy to the reciprocal tariffs.

Maintaining Discipline

The economic environment has proven resilient but delays in data and reasonable concerns with valuations have led to heightened market volatility. During this period, where policy dynamics and ambiguous data create a cloudy outlook, prudent discipline and diversification in your portfolio are essential. Your ongoing dedication to a robust, long-term financial plan remains the firmest foundation against future change. On behalf of our entire team, thank you for your continued trust.