US Strategy Weekly: #happythanksgiving

“Piglet noticed that even though he had a very small heart, it could hold a rather large amount of gratitude.”

A.A. Milne #gratitude #thanksgiving #piglet #aamilne #winnethepooh #happythanksgiving

The market has been on a wild roller coaster ride since our last publication on November 5, 2025. First the DJIA rallied 1,343 points in four consecutive sessions and then fell 2,163 points in the next four sessions. A lot of factors triggered this volatility but primarily it was linked to the changing expectations for a fed funds rate cut at the upcoming December FOMC meeting. At the risk of oversimplifying the market, it is obvious that investors feel safe to buy stocks when the Fed is dovish and lowering interest rates. But Federal Reserve Jerome Powell’s comments in mid-month suggesting a rate cut in December may not be guaranteed was a blow to this sense of safety. As a result, the consensus expectation for a December rate cut fell from 90% to 30% and has since rebounded to 82%.

What we noticed when we updated our files this week was that despite all the volatility in the stock market, the popular indices are where they were before we left for vacation. Technical indicators are also little changed, though a bit weaker than in early November. And economic data has also shown little change. Overall, economic data reveals no signs of a recession, but labor and housing markets are weakening.

Perhaps the most important data release was the delayed report on September payrolls. While the headline increase of 119,000 jobs was better than expected, the underlying data suggests something much weaker. BLS revisions indicated August payrolls were lower by 26,000 jobs, which means August payrolls declined by 4,000. July payrolls were revised down by 7,000 jobs. If one adjusts the September payroll for this revision of 33,000 jobs it meant there was a net gain of 66,000 jobs in September. Moreover, most job gains were in healthcare and leisure & hospitality, and many sectors had job losses. The unemployment rate rose modestly to 4.4%, because even though unemployment rose significantly in the household survey, the civilian labor force also rose. See page 4.

Keep in mind that November’s employment report will be released by the BLS on December 16 and there will be no October report. However, this means there will not be any more job data prior to the next FOMC scheduled for December 9-10, 2025.

September’s job report is important because it will be the last report before the next FOMC meeting and because the BLS indicated that survey responses were better than average. This implies that the data should also be better than the recent norm. In our view, the best test of strength of the labor market is defined by annual growth in jobs. Therefore, we measure the year-over-year growth rate of employment in both the establishment and household surveys. The establishment survey showed jobs increased 0.8% YOY in September and the household survey had an increase of 1.14% YOY. Both were below their respective long-term averages of 1.7% and 1.5%. The good news is that BLS surveys continue to show job growth, the risk is that both rates are decelerating. A negative growth rate in employment is the definition of a recession. Our fear is that once the BLS makes its annual adjustments to the data (scheduled for January’s report released in early February), it could show that job growth has already turned negative. (Note: recessions are usually identified retroactively.) Given that this is a risk, we believe it would be prudent for the Fed to lower rates again in December. See page 4.  

The 3-month average of job growth rose from 18,330 to 62,330 in September. However, BLS revisions have been consistently negative which may bring this average back toward zero with November’s report. This is another concern since a negative 3-month growth rate has also identified recessions. See page 5. Also note that while the unemployment rate for college graduates is consistently lower than the broader unemployment rate, September’s college graduate unemployment rate of 2.8% is the highest in four years.

The JOLTS report has become widely followed by economists even though it lags regular employment data by a month. The JOLTS report for August showed the job opening rate was unchanged at 4.3%, but the separations rate fell 0.1 to 3.2% and the hiring rate fell 0.1 to 1.9%. See page 3. In short, the pace of hiring is declining, and workers are holding on to current jobs. All in all, the data points to a weakening labor market.

The ISM manufacturing survey for October was down slightly; however, employment and new orders were up for the month. The ISM nonmanufacturing index rose in October from 50.0 to 52.4 with the strongest increases seen in business activity (49.9 to 54.3), new orders (50.4 to 56.2), and employment (47.2 to 48.2). The small increases seen in the employment components of both ISM indices lifted the total ISM employment index back into normal range. This is reassuring since both July and August showed this indicator in negative territory. See page 6.

The NFIB small business optimism index fell 0.6 points in October to 98.2. The decline in the survey was due primarily to a drop in actual earnings which fell from minus 18 to minus 25. Actual sales changes also fell from negative 7 to negative 13. Meanwhile, the uncertainty index declined from 100 to 88. This was an improvement and was the lowest uncertainty reading this year. There has been a strong historical correlation between the unemployment rate and poor sales for small businesses. Both have been rising in recent months, which is another warning sign for the economy. See page 7.

The PPI report for September revealed less inflation than expected and this sparked a market rally. The PPI for finished goods was up 3.3% YOY, the core PPI for finished goods was up 2.85% YOY, and the PPI final demand index was unchanged at 2.7% YOY. Note that all these results are favorable when compared to the PPI’s long-term average of 3.2% YOY. We remain optimistic about longer-term inflation as long as the price of oil remains below $60 a barrel. With oil prices down 13.5% YOY in November to date, and negative on a year over year basis since July 2024, we doubt that there is a worrisome inflationary cycle ahead. Most economists should know this, yet inflation fears continue to plague consumer sentiment. See page 9. In sum, economic data shows little inflation averaging around 3%, job growth declining, the housing market decelerating, and consumer sentiment at recessionary levels. Yet despite all this gloom, the earnings picture is robust. According to S&P/Dow Jones data, the S&P 500 earnings gain over the last 12 months is 12.9% YOY, far better than the 75-year average of 8.1% YOY. See page 10. And the 12-month forward earnings yield for the S&P 500 is 4.6%. When coupled with a dividend yield of 1.2%, this 5.8% total yield is quite attractive relative to the 10-year Treasury bond yield of 4.0%. We continue to believe that analysts have underestimated both GDP and earnings growth for this year and into 2026. While the S&P 500 index is up 15% year-to-date, earnings are also up 13%, and this means that there has been little multiple expansion this year. We remain a buyer of stocks on dips.     

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