Last week we processed robust economic data and growing clarity on Federal Reserve policy, instilling a consensus view for a strong market that is now well reflected in positioning.
Employment figures showed a resilient economy, with jobless claims consistently in a healthy range and payroll growth rebounding after disruptions from the earlier hurricanes. The unemployment rate ticked up to 4.2%, aligning with the Fed's long-term target, but this is less a sign of weakness and more a reflection of a stabilizing labor force. Lower immigration will constrain the growth in the labor force ahead.
The Treasury market reacted swiftly to the employment report, with yields initially dropping on expectations of Fed easing. The 10-year yield closed the week below 4.2% and well below its recent highs, reflecting the softness in the household survey and market confidence in moderating rates as we move into 2025. One key factor calming bond markets was the appointment of Scott Besant as Treasury Secretary, whose mainstream economic views reassured investors concerned about deficits and fiscal policy volatility.
Looking ahead, the Fed's upcoming decision looms large. I anticipate a 25-basis-point cut in December, paired with a strong signal to pause further easing—a so-called "hawkish cut." Markets are pricing in one or two additional cuts in the first half of 2025, but the Fed’s stance on the neutral rate of interest, which I believe is higher than its current estimate, will shape the trajectory and we will learn more about that in the December 18 meeting.
Inflation remains well-contained, though the University of Michigan’s one-year inflation expectations shot up to 2.9%, warranting close attention and possibly signaling concerns about Trump’s tariff policies.
I found it curious that Trump threatened 100% tariffs for the BRICS nations wanting to implement a new reserve currency, while also championing the rise of Bitcoin’s price surpassing $100,000 and attributing it to his pro-crypto world view. Bitcoin is viewed by many as an alternative global currency similar to what the BRICS are looking to achieve. Bitcoin is far more of a threat to replace the dollar in world reserves than anything created by the emerging market economies.
Equities remain strong, buoyed by a decline in real yields, with the 10-year TIPs yield now below 2%. However, at 22 times earnings, valuations are not cheap. December traditionally delivers strong performance, but when consensus becomes too confident in a “Santa Claus rally,” markets have a habit of surprising. Investors should be careful from becoming over-exuberant in December. I could see a muted and rather disappointing next few weeks, while a better Q1 if economic conditions hold steady. Of course, 2025 is unlikely to be as strong a market as we had in 2023 and 2024.
Finally, structural forces such as immigration and AI-driven productivity gains will influence growth trends in 2025. With immigration flows slowing, productivity improvements, particularly from AI adoption, will be critical. While AI cannot yet replace all forms of labor, its impact on middle management and sectors like transportation could prove transformative, offering both risks and rewards for forward-looking investors.
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Professor Jeremy J. Siegel
Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
Past performance is not indicative of future results. You cannot invest in an index. Professor Jeremy Siegel is a Senior Economist to WisdomTree, Inc. and WisdomTree Asset Management, Inc. This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.
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