Market Commentary, December 2025

The S&P 500 Index managed a modest advance in November, extending the index’s monthly winning streak to seven, the longest in four years. Value stocks turned the tables on Growth stocks, with the Russell 1000 Value Index posting a 2% gain and the Russell 1000 Growth Index declining by 2.3% in November. At the sector level, eight of the 11 S&P 500 sectors were up in November, led by Healthcare with a 9% gain and Communication Services with a 6% gain. Technology stocks dropped 4% in the month after registering a 6% gain in October. The Fixed Income markets continued their terrific run, gaining 0.6%, pushing the year-to-date return to 7.5%.
 

If Santa should fail to call, bears may come to Broad and Wall.

- Yale Hirsch

'Tis the Season for Stock Gains

The classic market adage from Hirsch, creator of the Stock Trader’s Almanac, refers to the “Santa Claus Rally” — a tendency for the stock market to rise in the last week of December through the first two trading days of January. “Broad and Wall” is the intersection in New York where the New York Stock Exchange is located, symbolizing Wall Street. If the market does not rally during this period, it’s often seen as a bearish signal for the coming year.

November’s modest finish and rotation under the surface set the stage for a closely watched year-end. November 2024 was much stronger (a 6% gain), buoyed by post-election tailwinds and buyback seasonality. November 2023 was also a standout (a 9% gain), a classic “risk-on” surge driven by interest rates rolling over and a broad market multiple expansion. November 2025, by contrast, delivered a fractional gain and a notable mid-month drawdown followed by a late rebound, failing to deliver the typical November vigor investors expect.

Even with the S&P 500 Index’s subdued November performance, there was a meaningful leadership change beneath the index level. As noted earlier, Value outperformed Growth by more than four percentage points, one of the widest monthly Value beats in more than two decades. At the sector level, investors showed a clear preference for defensive earnings stability, as Healthcare delivered its strongest monthly return in three years. Consumer Staples, REITs, Financials, and Utilities also outperformed, while Technology stocks lagged behind. Tech’s weakness may be attributed to investors reassessing AI-linked stocks because of stretched valuations and funding circularity risks.

Small caps outperformed large caps, aided by rising odds of a December Federal Reserve rate cut. Small-cap companies typically rely more on external financing and have a greater proportion of floating-rate or short-term debt compared to large-cap companies. As economic conditions improve, small caps can see outsized gains as investors rotate into undervalued opportunities. Market studies show that small caps have often outperformed the S&P 500 Index by several percentage points annually in the 1- 3 years following Fed rate-cutting cycles. 

While one month’s performance doesn’t establish a lasting trend, the recent sector rotation toward defensives is worth monitoring as market conditions evolve. Staying attentive to these shifts can help investors position portfolios more effectively if the pattern persists. Interestingly, small caps posted gains that run counter to the defensive rotation, reflecting their sensitivity to improving financial conditions and potential benefits from anticipated rate cuts. This divergence underscores the importance of looking beyond headline sector moves to understand the full market landscape. Diversification remains a critical strategy for managing risk as financial markets adapts to evolving economic conditions.
 

Backlogged Data Floods In

After the record 43-day federal government shutdown ended in mid-November, statistical agencies began working through a significant backlog of economic releases. Many reports for September, October, and November were delayed, consolidated, rescheduled or cancelled. The primary delayed reports released in November included:

• September Jobs Report (Employment Situation Report): Originally scheduled for release in early October, the full report was released on November 20, showing the U.S. economy added 119,000 jobs in September and the unemployment rate inched up to 4.4%.
• September Personal Consumption Expenditures (PCE) Inflation Data: The U.S. Commerce Department released the September PCE data, the Federal Reserve's preferred inflation gauge.
• September Producer Price Index (PPI): Data on wholesale inflation for September was among the reports released.
• Other various September data: This included import and export prices, quarterly employment costs, and some retail trade and inventory data, which helped fill the information vacuum for economists and policymakers.

Notably, the Bureau of Labor Statistics (BLS) was unable to collect all data required for a full October jobs report and a full October Consumer Price Index (CPI) report and as a result those specific reports were cancelled or would be merged with the November data for a December release. 
 

Reading Between the Lines: Data Delivers Surprises & Signals

The delayed economic reports released in November offered a mixed picture for investors, with data pointing to a cooling, but resilient economy. The September jobs report showed stronger-than-expected growth but a higher unemployment rate. The September PCE inflation data indicated that core inflation was in line with expectations.   The blend of cooling economic indicators and steady inflation sparked fresh optimism among investors, fueling hopes that the Federal Reserve will deliver a rate cut at the December 10 Federal Open Market Committee meeting. This renewed confidence sent ripples through both stock and bond markets, as participants reposition for a more accommodative policy backdrop.
 

Beige Book Browsing

The Beige Book is a Federal Reserve report published eight times a year that summarizes economic conditions across the twelve Fed districts, based on interviews with business contacts, economists, and market experts. It provides timely, anecdotal insights into trends in consumer spending, employment, and inflation, helping investors and policymakers gauge the health of the U.S. economy. The latest Beige Book, released last month, indicated that economic activity was little changed, but pockets of weakness emerged. 

Consumer spending softened, especially among lower- and middle-income households, while higher-end retail remained resilient. Manufacturing saw modest gains, but nonfinancial services and residential construction were mixed. The report showed that the labor market momentum slowed. Layoff announcements increased, but many firms preferred hiring freezes or attrition over outright cuts. Wage growth was modest, and rising health insurance premiums continued to pressure labor costs.

Inflation remained elevated but showed signs of gradual cooling. Prices rose modestly, with input cost pressures widespread in manufacturing and retail, largely reflecting tariff-induced increases. The Fed’s preferred inflation gauge, core PCE, remained above the 2% target, but forecasts suggest a gradual cooling into 2026.

Outlooks are cautious, with risks tilted toward slower growth. Business contacts and forecasters expressed increased uncertainty about the pace of activity in coming months. While some optimism persists among manufacturers, most expect restrained hiring, softer spending, and elevated uncertainty as 2026 approaches.

The Fed is expected to ease interest rates, but at a gradual pace. Panelists anticipate a 25-basis-point rate cut in December, with further easing likely to be measured rather than aggressive. The Fed remains focused on balancing inflation risks with the need to support growth, and the November survey suggests policy will remain data-dependent.

Taken together, November’s data releases showing cooling consumer demand, easing labor conditions, and persistent but moderating price pressures, aligns closely with the Beige Book’s narrative of an economy losing momentum without a sharp downturn. Both point to a landscape where growth risks are rising and policy makers remain focused on inflation, reinforcing a cautious stance heading into year-end.
 

Looking Ahead

Markets face a convergence of critical events and seasonal dynamics in December. The Federal Reserve’s final meeting of the year on December 10, alongside key releases such as nonfarm payrolls on the 16^th and CPI on the 18^th, will shape expectations for policy into 2026. Historically, December tends to favor equities with the so-called “Santa Claus Rally” often lifting returns in the latter half of the month, though thinner liquidity and tax-loss harvesting can add volatility. Against a backdrop of moderating inflation and a cooling labor market highlighted in November’s Beige Book, investors should anticipate choppy trading as positioning adjusts ahead of year-end. Staying disciplined and focused on fundamentals will be essential as macro uncertainty collides with seasonal optimism.

One More Change

In the midst of the market uncertainty outlined above, there is one more change that hits closer to home but about which we are very excited.  On December 8, we became Towne Trust Company, N.A. (“Towne Trust”), part of the TowneBank family of companies. Best of all, we remain the same dedicated partner with the same team of seasoned subject matter experts, all of whom are committed to providing you with the finest client experience possible.

Thank you for your continued confidence in our team, and please reach out with any questions you may have. It is our pleasure to share life’s journey with you.