by Professor Jeremy J. Siegel, Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
The first full week of the holiday shopping season confirmed what I was looking for: consumers are still spending, and they are not being spooked by tariffs or headlines. Black Friday sales were solid, and the weekend into Cyber Monday largely matched expectations. This was a window where any real bite from tariffs would have shown up in retail weakness, and we simply did not see that. The story is not “gangbusters” demand, but a steady, resilient consumer who continues to underpin the expansion.
A more remarkable story last week came in the labor market. We saw one of the strangest divergences I have encountered in fifty years of following economic data. Jobless claims unexpectedly dropped below 200,000 to their lowest level in more than three years, while the ADP employment report showed the largest job loss in nearly three years. Those two indicators usually move in opposite directions with an extremely high negative correlation; to get the “best” claims print and the “worst” ADP print at the same time is extraordinary. This is the “no-hire, no-fire” economy taken to an extreme—firms are reluctant to fire because they still fear labor shortages, but they are also cautious on new hiring. We have to caveat these numbers: the claims data covered Thanksgiving week and may have unusual seasonal quirks, and ADP is not a perfect substitute for the official payrolls, which we don’t have because of the government shutdown. Once the full data set comes in and gets revised, this extreme divergence may narrow. But the first read underscores my primary read of no major labor-market breakdown.
Against that backdrop, the Fed is heading into this week’s meeting with markets pricing about a 90% probability of a rate cut, and I think they will deliver it. We are in the quiet period, so Chair Powell could not speak out against that expectation even if he wanted to, and he has historically been reluctant to shock markets when expectations are this one-sided.
I expect a 25-basis point cut, but it is likely to be a hawkish cut. The statement will likely emphasize a willingness to pause in January if the labor data remain firm, and we could see three or four dissents: Miran continuing to push for a 50-basis point cut, and two to three hawks arguing for no cut at all. That combination—a cut plus visible internal resistance and talk of a pause—is what “hawkish easing” looks like. It acknowledges that the policy rate is too tight relative to inflation but tries not to ignite a larger scale easing cycle in expectations.
The underlying inflation picture gives the Fed room to move, whether they fully acknowledge it or not. Housing is the key. On a nationwide basis, year-over-year rents have flattened for the first time in many years, and the Case-Shiller Home Price Index is only up 1–2%. Housing inflation has essentially ground to a halt. Because of the way the official statistics are constructed, that disinflation shows up with a long lag in the CPI and PCE data. At the same time, commodities are not telling an inflation story: outside of some firming in oil due to geopolitical events and a bit of strength in copper, there is no broad-based move higher.
Most importantly in my framework, money supply growth remains subdued. Deposit growth is running in the 3–4% range, and M2 is closer to 4% only because currency is adding a small nudge. Those are low-end growth rates and are not inflationary at all.
The most puzzling element on the inflation front is not current prices but expectations. The University of Michigan one-year inflation expectation is sitting around 4.5%, higher than virtually any economist, even the pessimists, believe will actually be realized. This is where the tariff scare has done more damage in people’s minds than in the real data. Households seem to think we are heading into a 4–5% inflation world, while the incoming data and the weak money supply point to something more like 2–3%. If that gap closes the way I expect, realized inflation coming in well below what people feared, real wages will surprise to the upside as workers find that their paychecks go further than they anticipated.
On top of that, the tax cuts that will flow through from the Trump tax bill into 2026 are another support for real disposable income. Put those pieces together, and you get a potential tailwind for growth into 2026 rather than a drag. There are important policy and political crosscurrents to watch, but they do not change my base case of no recession and continuing economic strength.
Looking into early next year, we also face the very consequential question of who will lead the Fed. President Trump has promised to name a new Fed chair early in the year, and it is increasingly looking like Kevin Hassett is the frontrunner. I will have more to say about the implications of a Chair Hassett in future commentaries, but directionally, investors should assume a more dovish, pro-growth tilt in the medium term than the current Powell regime.
For equity investors, the most immediate implication of this week’s likely cut is in the relative performance of small caps versus the broader market. I do not expect the long bond to move that much; the 10-year Treasury yield looks stuck in the 4.0–4.25% range in my view. But a lower short rate meaningfully eases financing pressures on smaller firms and should be a clear positive for small-cap equities after a long stretch of underperformance.
December is traditionally a seasonally strong month for stocks, and everyone likes to talk about that pattern, but we have just lived through months where seasonality “should” have worked and did not. Seasonals might give you a 5% edge at best, which means they fail 45% of the time. The one seasonal I do give more weight to is the short window between Christmas and New Year’s, the so-called Santa Claus rally.
Even so, my instinct for this December is not for spectacular gains but for a relatively flat month as markets digest the Fed’s message and wait for clarity on tariffs and policy heading into 2026. That consolidation would be healthy if it comes with a subtle rotation — away from over-owned megacaps and toward smaller, rate-sensitive names that benefit most from the first leg of easing.
