Economic Commentary
The Health of the Consumer and the Holiday Shopping Season
The shift in holiday spending patterns is more than just a retail curiosity; it reflects a fundamental change in how consumer spending is measured. The pre-holiday “pull-forward” strategy, driven by aggressive online promotions, suggests that the question is not about the line outside the store, but about the aggregate wallet share captured over a longer period. More interestingly, there is a disconnect between consumers’ feelings and their actions. Survey sentiment has cratered to levels last seen in previous periods of anxiety (like the tariff disputes), yet actual cash register activity remains firm. This behavioral asymmetry is critical as sentiment has proven to be a poor predictor of spending. It may hold up, but certainty is still elusive. On the labor front, the weekly jobless claims data—a highly useful, high-frequency indicator—sits reliably around 220,000. This is what you want to see: a market that is neither tight enough to fuel wage inflation nor weak enough to signal mass corporate retrenchment (the “no-fire, no-hire” equilibrium). Coupled with Q3 GDP tracking near 4%, the economic landscape is one of real growth that contradicts the prevailing narrative of worry. As is often the case, the hard data suggest greater stability than the commentary implies, and it is the data that matter most.
Interest Rates and the Fed
The decline in the 10-year Treasury yield to below 4% is a necessary, and perhaps overdue, adjustment. The earlier panic that pushed yields sharply higher reflected an overshoot in “higher for longer” fears. The subsequent reversal indicates increased market confidence that inflation is, in fact, contained, and that policy does not need to remain restrictive indefinitely. This movement affords the Fed room to maneuver, which is valuable. Consequently, a 25 basis-point rate cut at the next meeting is a distinct possibility. We anticipate this would be handled with extreme caution—a “hawkish cut.” The Federal Open Market Committee (FOMC) would ease policy in response to favorable data while simultaneously issuing a clear warning that it is prepared to pause immediately to assess the effects. This measured response reflects the appropriate behavior of a central bank that is moving with the data but is highly averse to premature declarations of victory. While the long-term 2026 Dot Plots offer little predictive value, the current bias suggests the path of least resistance for policy is toward easing, not tightening, and the 10-year yield will likely remain capped near 4%–4.25% unless a significant surprise emerges.
Investment Commentary
November provided a crucial case study in market volatility and the power of changing expectations. The month began under a cloud of concerns that typically shake investor conviction: a record-long government shutdown, the inherent risks embedded in elevated Big Tech valuation multiples, and the lingering residue of hawkish Federal Reserve sentiment. These fears were quantified by consumer sentiment falling to its lowest level since 2022 and volatility spiking to its highest reading since April—a reflection of heightened uncertainty. However, the narrative shifted dramatically mid-month, driven by a sharp increase in market expectations of a December rate cut. This adjustment led to a strong late-month rally, allowing the S&P 500 to finish marginally higher by 0.25%. Sector performance, as often happens, lacked uniformity: Health Care posted an exceptional 9% gain, its strongest since April, while Information Technology experienced meaningful pressure, shedding 4% as the periodic debate over the sustainability of the AI-driven rally came to the fore. The subsequent recovery in the sector only underscores the continued dichotomy between growth potential and valuation risk, which demands an active investment approach in the current environment.
As investors begin to question the sustainability of technology-sector fundamentals again, it is appropriate to pause and reflect on where we are in the current cycle. The technological revolution in AI is a prime example of a fundamentally sound investment thesis, but one fraught with risks regarding execution and valuation. The emergence of strong competitors such as Gemini rapidly challenges the presumed “moats” and valuations of existing players, including OpenAI. The competition is fierce, not only in software (large language models) but also in underlying hardware (silicon and proprietary chips). This intensity has two sober implications for investors. First, the required massive capital expenditures imply that the true fixed-cost structure of these businesses may be higher and less stable than traditional models suggest. Second, the long-term productivity gains from AI are undeniable, but the investment problem is one of value capture: precisely which companies—the chipmakers, the cloud platforms, or the application developers—will ultimately translate the technological progress into sustainable, outsized profits. The difficulty in answering this question, combined with the rapid pace of change, highlights why active management is essential. It provides the only means to perform the necessary in-depth research to navigate the complex value chain, assess true economic costs, and make intelligent choices rather than passively accepting the risks of an index.
Wealth Planning Commentary
With one month left in 2025, December is the month to focus on any year-end tax planning. In the second part, I have highlighted a few changes for 2026.
Important year-end tax planning for 2025
- Charitable giving: With new restrictions coming in 2026, consider “bunching” multiple years of donations into 2025. You can contribute appreciated securities or use a Donor-Advised Fund (DAF) to maximize deductions this year. We are happy to discuss this with you at any time.
- Roth conversions: If you are in a lower tax bracket this year, converting a traditional IRA to a Roth IRA can be beneficial. However, this is a taxable event, so analyze your current and future tax rates before acting with a tax professional.
- Retirement contributions: Maximize contributions to your 401(k), IRA, and HSA before their respective deadlines.
- Tax-loss harvesting: Offset capital gains by selling investments at a loss. Wherever we can, we are realizing losses to offset capital gains.
- Business owners: Take advantage of 100% bonus depreciation for qualifying new assets placed in service after January 19, 2025. Other provisions, like the QBI deduction, have been made permanent. Please consult with your tax professional to understand how these two changes might or might not benefit you.
Key changes to tax rules beginning in 2026
- Charitable giving: For itemizers, a new floor will be introduced, under which only contributions exceeding 0.5% of AGI are deductible. Top-bracket taxpayers will have their charitable deductions capped at 35%. A smaller deduction for non-itemizers is reinstated, with a maximum of $1,000 for single filers and $2,000 for married couples filing jointly, even if you take the standard deduction. If you are over age 70, the rules stay the same for making charitable contributions directly from your IRA. The direct IRA to charity method is not subject to the new 0.5% AGI threshold.
- Estate and gift taxes: The federal estate and gift tax exemption will increase to $15 million per person ($30 million per married couple) and be indexed for inflation.
- Annual Gift Tax Exclusion: This remains at $19,000 per recipient in 2026. Married couples can gift $38,000 per recipient.
- Alternative Minimum Tax (AMT): For high-income taxpayers, the exemption phaseout threshold will revert to 2018 levels, and the phaseout rate will accelerate, which could slightly increase taxes.
- Retirement contributions: The annual contribution limit for 401(k) plans will increase to $24,500, with a higher catch-up limit for those 50 and older. A Roth catch-up requirement for high earners takes effect.