RECAPPING LAST WEEK
Despite ending on a four–day losing streak, the S&P500 index posted its third consecutive year of
above–average returns, rising 16.4% in 2025. The U.S. equity benchmark closed the year within
about 1% of its all–time high. The Nasdaq Composite gained 20.4% while the Russell 2000 rose
11.3%. International equities had the strongest performance, with the MSCI EAFE index climbing
nearly 28% and the MSCI Emerging Markets jumping over 30%. Volatility as measured by the VIX
ended near the lows of the year after spiking above 60 during April’s tariff–induced equity market
swoon. Technology and communications were the dominant U.S. sectors, each rising more than
20%.
The “Magnificent Seven” tech stocks outperformed, fueled by the allure of artificial
intelligence, although some valuation concerns crept in towards year–end given those companies’
massive capex outlays. U.S. Treasury yields trended lower after peaking early in the year while
the spread between short–term and long–term rates increased meaningfully. The yield on two–year
notes fell 76 basis points to under 3.5% as investors priced in rate cuts from the Federal Reserve.
Meanwhile, the 10–year yield finished above 4.15% as GDP growth was solid and inflation
expectations remained elevated. In the commodities space, gold and silver rocketed higher,
posting their best returns since 1979. Oil prices, however, suffered their worst drawdown since
2020 as multiple threats of supply disruption failed to materialize. Bitcoin’s rollercoaster year
ended with the largest cryptocurrency down 7%. A sharp drawdown ensued after prices reached a
record high above $127,000 in early October.
Turning to year–end economic data, the long–delayed U.S. Q3 GDP data came in at 4.3% growth, well above expectations and surpassing the3.8% rate from Q2. Consumer spending increased at a robust 3.5% rate while the PCE price index
rose 2.8%, still significantly above the Fed’s 2% target. The Congressional Budget Office estimated
that the government shutdown could slice one to two percentage points off Q4 GDP but that
most of the drop may be recovered in subsequent quarters. U.S. consumer confidence fell for a
fifth straight month in December to 89.1 on more pessimistic views of the jobs market. Minutes
from the recent FOMC meeting reflected a deeply nuanced debate about U.S. economic risks,
with most members ultimately supporting a rate cut given the slowdown in job creation. Overseas,
China’s blue–chip CSI300 index gained 18%, its best performance in five years, despite the tariff
battles with the U.S. The country’s factory activity ended the year on a positive note, with
manufacturing PMI rising to 50.1 in December on a jump in pre–holiday production. President Xi
pledged “more proactive” macro policies in 2026 to expand investment and support growth.
THE WEEK AHEAD
The new year got off to an inauspicious start on Friday as risk assets initially rallied but faded
sharply into midday before clawing back some losses. Investors have much to consider this month
as we could see a Supreme Court decision on the legality of tariffs along with the choice of a new
Fed chair. Additionally, the unprecedented events in Venezuela over the weekend and the
upcoming corporate earnings season may lift volatility from its year–end lows. This week’s
economic calendar will be busy as the release of U.S. data starts to normalize. Top of mind will be
Friday’s employment report, with forecasts calling for 55,000 jobs created in December. There
may be significant revisions to the prior month’s figure of 64,000 given the low participation rate in
that data batch collection. The JOLTS job openings, ADP private payrolls, and Challenger job cuts
reports should provide added color on the labor market. The ISM PMI surveys will also be
released this week, along with factory orders, trade balance figures, and delayed housing data.
January’s preliminary consumer sentiment and inflation expectations round out the domestic
agenda. On the international side, inflation updates from Europe, Australia, and China are the
main releases of note.
(Schwab)
