Economic news was surprisingly supportive of a rate cut later this month, but this was not apparent in the news headlines. Regarding inflation, Reuters wrote “US consumer inflation increases steadily, but households paying more for food and rents.” The actual CPI report showed headline inflation was unchanged at 2.7% YOY and core inflation fell from 2.8% to 2.6% YOY in December. (Note: Due to the government shutdown, there was no inflation report for October, and only partial data for November. However, for our charts, we left October data unchanged from September and incorporated BLS data for November and December. The BLS release has a chart showing headline inflation falling from 3% in September to 2.7% in November/December and core CPI falling from 3% in September to 2.6% in November/December.)

It is true that food inflation was 3.1% in December, up from 2.6% in November but this was due to stubborn inflation seen in meats, poultry, fish, and eggs at 3.9%. However, this category is down from 4.7% in November and a recent peak of 7.9% in March 2025. The other culprit in the food category is nonalcoholic beverages and beverage materials which indicated prices rose 5.1% YOY, up from 4.3% YOY in November. Food away from home has always remained high and in December it showed prices up 4.1% YOY versus 3.7% in November. Yet despite the increases in food inflation, core CPI fell because energy price inflation fell from 4.2% YOY in November to 2.3% YOY in December. The Reuters headline regarding rents is true since prices are typically rising except for periods of recession or depression, but it is still misleading since homeowners’ equivalent rent was 3.4% YOY, down fractionally from November and down from 3.8% in September. In short, don’t rely on headlines if you want the real news.

The ISM nonmanufacturing index was 54.4 in December, up from 52.6 and six of the nine components rose during the month. The declines were seen in suppliers’ deliveries, order backlog, and prices paid (a plus!). The employment index was 52.0, up from 48.9, and the sum of employment in both surveys now totals 96.9. This is good news since it carries this index safely into neutral territory and above the danger zone of 92.1 or less. See page 6. This is especially reassuring since the December job report was worrisome.

The employment report indicated a below consensus 50,000 jobs were created in the month of December. However, the underlying data was weaker since previous months were reduced by a net 76,000 jobs. In short, the 3-month average fell to a loss of 22,330 jobs per month. Most concerning is that the year-over-year change in employment shows the growth rate fell to 0.4% YOY, which is well below the long-term average of 1.7% YOY. Note that when the year-over-year change in jobs turns negative it is a near-certain sign of a recession. In contrast, the household survey was more sanguine and showed the unemployment rate fell from 4.5% in November to 4.4% in December. This was due in large part to a decrease in the civilian labor force and a 278,000 decline in the number of people unemployed. The U6 unemployment rate fell from 8.7% to 8.4%. See page 3.

Deceleration in the labor market is obvious in the numbers. Over the last twelve months, the average growth in jobs was 48,670 per month; this fell to 14,500 per month over the last six months. The current 3-month change shows a loss of 22,330 jobs per month. As we noted, December’s household survey was the most positive of the two BLS surveys, but while the household survey tends to be volatile it rarely diverges from the establishment survey for long. See page 4. Keep in mind that the jobs report for January will incorporate several revisions including the annual benchmark revision. The BLS already estimated this benchmark revision will show that the economy generated 911,000 fewer jobs than reported between April 2024 and March 2025. This amounts to roughly 71,000 fewer jobs a month, far fewer than the original estimate of 147,000 jobs created per month. On a happier note, the misery index (the sum of the unemployment rate and the rate of inflation) is 7.1% and well below the 12.5% negative level. 

Under normal circumstances December’s weak employment report coupled with December’s mild inflation report might inspire the Federal Reserve to lower rates at their January 27-28, 2026, meeting. However, the controversy over subpoenas sent to Powell asking for more information regarding the Fed’s $2.5 billion renovation project may result in a harder stance by the FOMC later this month.

Federal Reserve Chair Jerome Powell announced over the weekend that he has been indicted by the Department of Justice; however, President Trump said he was unaware of the situation. US Attorney Jeanine Pirro stated that the word indictment only came from Powell and subpoenas would not have been needed had he responded to requests for information. Nevertheless, President Trump’s comments calling Powell “incompetent or a crook,” only stoked the situation into a global media frenzy.

Equities, particularly financial stocks, fell this week after President Trump said credit card rates should be capped at 10%. We doubt that any president has the power to cap credit card rates; nevertheless, equity prices fell. President Trump is also fomenting uncertainty by urging Iranians to continue to protest and indicating that “help is on the way.” He also announced his intention to impose 25% tariffs on countries doing business with Iran. These events have pushed the capture of Nicolas Maduro, Venezuela, Greenland, and the pending Supreme Court decision on tariffs, to the background. Of these, only the decision on tariffs will have economic ramifications, in our view.

What is most important for investors is fourth quarter earnings season. In 2025, the equity market was supported by a steady string of positive earnings surprises. This will be more difficult to accomplish in 2026, but we believe it is possible. Financials typically start the earnings season and JPMorgan Chase & Co.’s (JPM – $310.90) results were less than stellar and this weighed on the stock market on Tuesday. Ten more financial stocks will be reporting fourth quarter results this week. Good earnings reports are critical.

The LSEG IBES consensus earnings estimate for 2026 fell $0.04 to $313.84 this week. The S&P Dow Jones estimate for 2026 fell $0.42 to $310.43. Our estimate for 2026 is $315, and we believe this could prove to be conservative. Although PE multiples appear rich, it is important to note that the forward earnings yield for the S&P 500 is 4.6% and the dividend yield is 1.2%. This sum of 5.8% compares well to a 10-year Treasury bond yield of 4.2%. Plus, the 12-month sum of S&P 500 operating earnings shows growth of 14.2% YOY, far better than the 75-year average pace of 8.1% YOY. On a technical basis, breadth data has been bullish. The NYSE cumulative advance/decline line made a record high on January 13, 2026. This means that advancing stocks outnumbered declining stocks despite the 398.21-point decline in the Dow Jones Industrial Average on January 13^th. The 10-day average of daily new highs is currently 461 and the 10-day average of daily new lows is 77. Since the new high list is averaging well over 100 per day, this is positive. Some have worried that sentiment has become too bullish; however, the AAII bullish index is at 42.5% and bearishness is at 30%. This is far from the 50/20 split that is negative. We remain a buyer of weakness.   

Gail Dudack

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Venezuela

Sometimes presidential actions have no economic significance, but often they do. There were many political stories to discuss this week, but the main one is that of Venezuelan President Nicolas Maduro and his wife Cilia Flores who were seized from their Caracas compound on Saturday and swiftly flown to the US as part of a special forces operation to face charges in a US federal court. Not surprisingly, politicians are looking for ways to divide public opinion and are campaigning on this action. Democrats are calling it an act of war and a US-driven regime change, while Republicans are calling it an enforcement of outstanding warrants for illegal drug, weapons, and narcoterrorism charges. There has not been a regime change in Venezuela. Delcy Rodríguez, Maduro’s vice president, is currently the acting president. Most of Nicolas Maduro’s ministers are still in their posts, and the powerful military remains loyal to her. It is also worth noting that left-of-center Wikipedia describes Maduro’s reign as “characterized by electoral fraud, human rights abuses, corruption, censorship and severe economic hardship. The United Nations (UN) and Human Rights Watch have alleged that under Maduro’s administration thousands of people died in extrajudicial killings and seven million Venezuelans were forced to flee the country due to economic collapse resulting from crippling US sanctions.”

But the seizure of Maduro could have economic as well as political repercussions. Experts are theorizing about Venezuela and Venezuela’s oil, but no one can be certain of what the future will bring. Still, oil and oil equipment stocks responded to the news as seen by year-to-date gains of 2.1% in the Energy Select Sector SPDR (XLE – $45.64) and 8.7% in the iShares DJ US Oil Equipment & Services ETF (IEZ – $22.69). See page 10. The ideal result of Maduro’s capture and imprisonment would be for current leadership in Venezuela to allow for a new election, the US helps rebuild Venezuela’s crippled resource sector, and all Venezuelans reap the benefits of a re-energized Venezuela and its wealth of oil and mineral reserves. This is aspirational but an extremely big leap. At present, one can assume that there should be more infrastructure spending in Venezuela and more oil coming to market in the future. More oil means lower oil prices, which also means lower inflation. This would be a plus for all consumers and investors and it should be good for US oil services and integrated oil companies.

Santa Claus Rally

2025 was a good year for equity investors but many are worried about 2026 for a variety of reasons. Equities did not follow seasonal patterns in the last year, yet some are still worried that there was no Santa Claus rally. The Santa Claus rally is determined by the last five trading days of the old year and first two trading days of the new year. In the S&P 500 index, this 7-day period ended with a loss of 0.11% and it was a cause for concern. The Nasdaq Composite index also lost 0.7%. However, the Russell 2000 index gained 0.3% and the Dow Jones Industrial Average gained 1.1%. In other words, not only was there a Santa Claus rally this year, but it was a demonstration of sector rotation with gains in small cap and non-technology issues. Sector rotation is a sign of a healthy bull market. So, we would ignore the naysayers and believe in Santa Claus.

Equity Ownership

Federal Reserve data regarding total household and nonprofit assets in June of 2025 showed equity ownership at a record 31%. This exceeds the prior June 2021 peak level of 30% and the March 2000 peak of 27%. Economists are worried. And when just measuring financial assets, equities represented a record 31% of household assets, far more than the 27.4% seen in June 2021 and 24.5% in March 2000. Nevertheless, the charts on page 3 explain why equity ownership has been rising. As corporations shifted pensions from defined benefit plans to defined contribution programs, household assets in pension fund reserves declined nearly 10% from a peak of 34.4% in March 2003 down to 24.8% in June 2025. Fed data includes equities owned directly or indirectly (through defined contribution or insurance plans) and therefore equity ownership levels have increased. Assets in noncorporate, or proprietors’ equity have also declined, and as a result, historical comparisons regarding household equity ownership are difficult. If one only looks at household assets in cash, bonds, and equities, the equity percentage in June was 70.5%, just below the 70.7% recorded at the end of 2021 and just above the 69.6% recorded in March 2000. Real estate ownership has also been declining, and young adults have been shut out of the real estate market due to unaffordable prices and high interest rates. As a result, we are seeing more young people investing in equities and Bitcoin. In sum, the level of household equity ownership for this generation is different and not easy to compare historically. In short, we are not worried about current equity ownership levels.

Economies by State

We were intrigued by a recent article on interstate migration. U-Haul Holding Company (UHAL – $53.37), the do-it-yourself moving and storage operator for household and commercial goods reviewed more than 2.5 million one-way transactions across the US and Canada for its 2025 Growth Index. The results showed that Texas tops the ranks of in-migration states, followed by Florida, North Carolina, Tennessee, and South Carolina. The states with the most people leaving are California, Illinois, New Jersey, New York, and Massachusetts. Blue-to-red state migration has become a hotly debated topic particularly now that states are redistricting and population has consequences in the House of Representatives. According to U-Haul, “the migration became more pronounced after the pandemic of 2020, continues to be a discernable trend, and seven of the top ten growth states currently feature Republican governors, and nine of those states went red in the last presidential election.” As a past New Yorker, who now enjoys Florida, the migration is understandable in so many ways.

The December ISM manufacturing index fell from 48.2 to 47.9, its tenth consecutive reading below 50. However, five of the ten components of the index rose for the month, and one — prices paid — was unchanged. Production fell slightly to 51.0, imports fell 4.3 to 44.6, inventories fell 3.7 to 45.2, and customers’ inventories fell to 43.3. But employment, new orders, suppliers’ deliveries, order backlog, and exports all rose. Overall, the survey was better than the headline, but manufacturing remains sluggish. See page 4.

Our recent outlook for 2026 indicated that our S&P 500 earnings estimate of $315 coupled with an unchanged trailing PE of 26 translates into a price target for the S&P of 8190. We continue to emphasize that this has been an earnings-driven rally. The LSEG IBES consensus earnings estimate for 2026 rose $1.51 to $313.88 this week. The 2027 forecast rose $1.46 to $359.43. The S&P Dow Jones 2026 earnings estimate rose $1.88 to $310.85. Both surveys are moving toward our estimate of $315, which may prove to be conservative. See page 5. At present, the forward earnings yield of 4.6% and dividend yield of 1.2% compare well to a 10-year Treasury bond yield of 4.2%. Plus, the 12-month sum of operating earnings shows a gain of 14.2% YOY, far better than the 75-year average of 8.1% YOY. And technical indicators remain positive. Most importantly, the NYSE cumulative advance/decline line made a new high on January 6, 2026, confirming the new highs in the indices. This implies the market advance is broad based and healthy. See pages 6-8.

Gail Dudack

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As expected, the Federal Reserve lowered interest rates by 25 basis points at its December meeting. It was the third consecutive meeting with a rate cut, and it brought the fed funds rate down to a range of 3.5% to 3.75%. The committee indicated that it anticipates one more quarter-point cut in 2026. The Fed also increased its median forecast for real 2026 GDP to 2.3%, up from 1.8% in September and 1.6% in June — and we believe this forecast will still prove to be too low. Unemployment expectations were unchanged and the core personal consumption expenditure inflation forecast fell slightly to 2.5%, a pace we believe could be on the high side for 2026.

At his press conference, Chairman Powell noted that “goods inflation remains elevated and the impact of tariffs remains a risk for future inflation.” We fail to see this in the numbers. Headline and core CPI have been hovering at the 3% level after rising from a 2025 low of 2.3% in April. However, goods inflation remains much lower at 2%. Even though Google states that “auto tariffs are taxes imposed on vehicles and components … raise vehicle costs for consumers, increase insurance/repair expenses, and disrupt complex global supply chains, leading to higher prices on new cars, even impacting U.S.-made ones due to imported parts.” The data shows that the price of a new auto rose a mere 0.8% YOY in September, up from minus 0.3% YOY in January. On the other hand, the broad service inflation index remained elevated at 3.7% YOY in September, down a bit from 3.9% in January. It is true that the CPI index for motor vehicle maintenance and repair was high at 7.7% YOY in September (down from 8.5% in August). But it is also true that it peaked at 14% YOY (nearly double the current level) in January of 2023, well before any tariffs were in place. See page 3. In short, recent maintenance pricing may be more “opportunistic” due to recent tariff mania, than due to imposed tariffs. We continue to point out that tariffs are not taxes. Taxes cannot be avoided. Tariffs can be avoided since consumers usually have the choice of alternative products. Moreover, tariffs are often absorbed or mitigated by foreign producers, foreign governments, intermediaries, and domestic sellers, well before they reach the consumer. This is not true of taxes. November CPI data will be released later this week.

Delayed releases are being reported this week and the most important of these is employment. November employment increased by 64,000, which was above expectations, however, it was offset by a loss of 105,000 workers in October. Federal jobs declined by 6,000 in November and a massive 162,000 in October. The October loss included federal employees who accepted a deferred resignation offer which became effective in October. August data was also revised down by 22,000 and September was revised down by 11,000. After all these revisions the 6-month pace of job growth fell from 53,000 in September to 16,670 in November. The year-over-year rate of change was 0.6% in November, down from 0.8% in October and quickly approaching a dangerous negative level. This decline in job growth is a big concern of ours since year-over-year declines in employment correlate highly with recessions. Moreover, the BLS has already announced its annual benchmark revision will be published with January’s employment report. It is estimated to lower total employment by 911,000.

In contrast to the establishment survey, the household survey showed employment increased by 323,000 in November. However, the household survey was not done for October, and this could be an estimate for November. This series can also be volatile, so we are not sure how to incorporate it into our analysis.

The household survey also includes the unemployment rate which rose to 4.6% from 4.4% in September. See page 4. However, while the regular unemployment rate rose from 4.4% to 4.6% the U6 unemployment rate which includes marginally attached workers plus total employed part-time for economic reasons rose from 8.0% to 8.6%. In line with this, discouraged workers rose to 681,000, the highest level since July 2020. In short, the job market is clearly weakening. See page 5.

People working part time for economic reasons rose by 909,000 to 5.49 million in November. October data was not available, so this change was between September and November; however, the 5.49 million was the highest level since the 5.8 million reported in January 2021 in the post-pandemic era. The brightest part of November’s report was that total average weekly earnings rose 3.5% YOY and earnings for production and nonsupervisory employees rose 4.2% YOY. Both were above the rate of inflation. Average weekly hours for private industry workers increased from 34.2 to 34.3 hours. See page 6.  

The employment cost index (ECI) was 3.6% in the third quarter, unchanged from the first and second quarters, but down from 3.9% seen a year earlier. It is also down substantially from the 5.1% peak seen in the second quarter of 2022. The ECI is likely to continue to fall as the implementation of AI expands and raises productivity. This will be good news for employers, corporate earnings and for inflation. Labor costs are the largest expense for most businesses and the gap between labor costs and inflation (the ability to pass on these costs) is narrowing, which is a favorable trend and a positive for future earnings. See page 7.

However, in terms of the ECI, there is a distinct difference between private and government workers compensation and costs. According to the BLS, as of June 2025, total compensation for civilian workers averaged $48.05 per hour worked. Total compensation costs for private industry workers averaged $45.65 per hour worked and state and local government workers averaged $63.94 per hour worked or were 40% higher. Within employer costs, benefit costs averaged $15.03 per hour worked for all civilian workers in June 2025, $13.58 per hour worked for private industry workers and $24.63 per hour worked for state and local government workers. This means benefits costs were 80% higher for government workers than private industry workers. This differential does not get much publicity, but perhaps it should. There were also big differences between paid leave, insurance costs, and retirement benefits, with costs for government workers much higher than for private workers. See page 8.

It is also worth noting that the federal deficit for November was $173.3 billion, down roughly 50% from a year earlier. The fiscal deficit year-to-date is $457.6 billion, down 25% from a year earlier. The reduction materialized from a combination of higher tax receipts and lower outlays. This is an important statistic for the debt markets, since this administration inherited deficits that were running at 7.2% of GDP in January. The current 12-month deficit through November was 5.3% of second quarter nominal GDP. This is an impressive accomplishment, and we believe GDP will be much higher in the third and fourth quarters – which means the ratio to GDP is even lower. The trade deficit also improved in September to negative $52.8 billion after peaking at negative $136 billion in March. This is decline in the trade deficit will translate into a higher GDP in the third quarter. All in all, while eyes are focused on the weak employment report and the upcoming CPI report later this week, there was good news in the cost of labor and the twin deficits. We remain a buyer of dips.

Gail Dudack

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