Chris DeLarme | Jan 05 2026 21:11
December closed out the year on a note that reflected its overall character—steady progress marked by cooling inflation, supportive monetary policy, and durable equity markets. Together, these forces helped preserve expectations for a potential soft landing as we enter 2026.
Market Leadership Broadens
One notable shift in December was the widening of market participation. While the “Magnificent 7” and AI‑focused companies continued to play a meaningful role, gains became more evenly distributed across sectors. This broader strength suggested a healthier backdrop heading into the new year.
Mixed Performance Across Major Indices
Index performance diverged meaningfully throughout the month. After a strong annual rise, the S&P 500 was essentially flat. The Nasdaq 100, which had led for much of the year due to momentum in AI and semiconductors, eased as investors locked in profits. Meanwhile, the Dow outperformed as capital moved toward more defensive, industrial‑oriented names.
Fed Actions and Policy Signals
The Federal Reserve delivered a third consecutive 25‑basis‑point rate cut at its December 10 meeting, bringing the target range to 3.50%–3.75%. Policymakers described growth as “moderate” and job gains as having “slowed,” while noting inflation remained “somewhat elevated.” Updated projections pointed to a gradual easing cycle over the next several years rather than a return to the ultra‑low‑rate environment of the past.
Minutes released later in the month showed a rare 9–3 split among committee members. The debate centered on whether inflation had cooled sufficiently to warrant easing or whether holding steady was necessary to avoid reigniting price pressures. Officials described the decision as “finely balanced.”
Inflation Continues to Cool
November’s Consumer Price Index report indicated further moderation. Headline inflation registered at 2.7% year over year, the lowest since mid‑year, while core inflation rose 2.6%. Shelter, medical care, and household furnishings remained areas of firmer pricing, but the overall trend aligned with a continued disinflation narrative as monthly increases came in below expectations.
Labor Market Softens
The labor market showed clearer signs of cooling. The unemployment rate ticked up to 4.6% in November, prompting the Fed to frame the labor environment as moving toward “better balance.” Payroll growth slowed sharply, with hiring concentrated in areas like healthcare and construction while sectors tied to transportation and consumer spending saw declines.
Services Hold Up as Manufacturing Contracts
Services activity continued to expand, supported by steady business activity and rising new orders. However, hiring within the sector remained soft. Manufacturing faced steeper challenges, with the key industry gauge falling to its lowest level in four months as companies pointed to weaker export demand and inventory adjustments.
Looking Ahead to 2026
As the new year begins, many strategists expect a soft‑landing environment, characterized by modest growth, further disinflation, and a measured pace of rate cuts. For long‑term, diversified investors, the guiding principles remain consistent: stay invested, maintain balanced exposure across growth and income, and view periods of volatility as opportunities rather than interruptions.
For a deeper discussion of what these trends may mean for your financial strategy, we encourage you to connect with our financial team for personalized guidance and support.