Starting on October 1st, the U.S. Government began the longest shutdown on record (43 days) and, during that time, most of the data that we rely upon to cast opinion on the state of the economy was frozen. Clearly, there were significant negative consequences on subsets of consumers that were directly affected; and there was a general nervousness about the potential spillover effects more broadly. However, for the most part, the average American does not change their activities based upon government-produced economic data, so perhaps the absence wasn’t that notable at all.

This could help explain the vast and persistent difference between sentiment and data. The American consumer, at least according to surveys, is grumpy. For example, the University of Michigan sentiment surveys are currently experiencing some of the lowest readings in the lengthy history (back to the 1970s) of that dataset. The Conference Board Consumer Confidence Indicator is currently dipping close to a level last seen in the lead-in to COVID and has been trending negatively since mid-2021. Lest we think it is only consumers that are unhappy, the Institute for Supply Management (ISM) surveys have been similarly ugly. The ISM Manufacturing value has been in contraction territory for all but two months since October of 2022.

The government did eventually reopen, of course, on November 12th, and all eyes were on how much light the delayed data could cast on the debate as to whether all these negative feelings would flow through. We received the September jobs report shortly after reopening, and then the October and November reports at the same time, just a few weeks ago in mid-December. The average number of nonfarm payroll jobs added for those three months was 22K, far below the average of 192K jobs added per month during 2023 and 2024, and even notably down from the 68K added per month from Jan through August of this year. So, that results in the 3-month moving average declining 90% (from 232K to 22K) over the course of this year. Consistent with this negative trend, the unemployment rate has now reached 4.6%, continuing a steady climb upwards since troughing at 3.4% in April of 2023.

However, as with most things, there is required nuance in the interpretation of these numbers. Most recently, the job loss of 105K in October was largely due to the reduction in the Federal workforce from the DOGE cuts earlier in the year. Contrarily, private payroll jobs added were solid in all three recently reported months, averaging 73K. Other supportive evidence lies in very contained jobless claims and solid job openings data. Finally, and perhaps most impactfully for the consumer, the real wage growth rate (average hourly wage growth minus CPI inflation) has been positive for 30 straight months.

As such, for as much as we were blind and worried throughout Q4 when it came to a labor market that had been widely marked as a point of concern – ours still appears to be a market that is slowing but does equally not appear to be on the verge of meaningful collapse. The phrase, or some derivative thereof, of “slow to hire, slow to fire” certainly seems to remain accurate.

And that has shown through in headline consumer activity and growth data. Real GDP was another data series that was put on significant hold during the shutdown. However, we finally got a reading of Q3 GDP on December 23rd, and it was very positive at 4.3% quarter-over-quarter (QoQ) annualized. Recall the first quarter of this year was a tariff-frontrunning-driven negative growth period. And there was one other quarter of very slight negative growth back in Q1 of 2022. Outside of those two instances, we have had 17 positive quarters since the beginning of 2021, averaging over 3%. That is incredibly strong growth overall and driven predominantly by the consumer. Personal Consumption has not seen a single negative growth period since COVID and has averaged 3.7% since 2021.

When you combine strong economic growth with an “okay” labor market, that could suggest little need for economic stimulus in the form of rate cuts. However, a rate cut is indeed what we received when the Federal Open Market Committee (FOMC) met in December. The 25-basis point (bps) cut brought the federal funds rate down to an upper limit of 3.75%. The question of why the Fed is cutting is certainly debated. Part of the answer lies in the growing coalition of belief that we are currently in a “K-shaped economy.” This is a creative way of saying that we have divergent economic realities where higher-income and net worth consumers are doing very well, while lower-income and net worth consumers are increasingly struggling. Economic data is driven by the aggregate consumer which is disproportionately represented in the upper leg of the “K” through high-income consumers. The average consumer, or the lower leg of the “K”, is larger in number, but smaller in economic impact. As we enter a midterm election year where “affordability” is shaping up to be the key campaign talking point, this notion of a bifurcated economic reality is of particular importance.

Speaking of affordability, the key example of associated data comes in the form of inflation levels. The Fed went out on a limb a bit by cutting rates before knowing inflation data for any period post September. Fortunately for them, the November Consumer Pricing Index (CPI) data came in favorably when reported on December 18th. Headline CPI decreased to 2.7% YoY while Core CPI decreased to 2.6%, both 0.4% lower than expected. To be fair, there are significant reasons to be skeptical about these specific datapoints given the shut-down influence on collection. However, this most recent print not only gave the Fed a sigh of relief for the cut just administered, but also, at a minimum, eases fears of run-away inflation that dominated much of tariff debates earlier this year.
Ultimately, there is still a great deal of cloudiness as it pertains to depicting the state of the U.S. Economy, and the data gaps/delays did not help to alleviate the fog. How can we have increasingly negative sentiment while activity remains remarkably robust? Is the data flawed, or does it accurately describe what really drives economic output whether we feel like it does or not? Are the surveys leading indicators of coming problems, or are they biased and not able to capture our bifurcated economic realities?

It could be we are in a simulation. But far more likely is that we are attempting to encapsulate the largest, most complex, and most rapidly evolving economic system in the history of the world with a handful of numbers and descriptors. Similar to catching raindrops in a storm, it is a challenge. In catching as many as we can and analyzing them as closely as possible, one would have to assume that our economy going into the new year remains largely as it has been – simply steady.

Speaking of “…the truth,” there is an old saying on Wall Street that price is truth and, on that metric, we close the year 2025 in the stock market with another improbable double-digit year of returns for the S&P 500. If Colonel Jessup himself would have predicted that in early April, I would have “strenuously objected” (watch the movie if you don’t get the reference). Let’s examine how it happened and what might be in store for 2026.

The fourth quarter of 2025 was not without some speed bumps. After hitting a new high in late October, the S&P 500 took a noticeable dip in November before rallying at the end of that month and going on to reach a new high on Christmas Eve. While stocks drifted a touch lower in the last few days of the year, the Large-cap index for the US rose +2.7% for the quarter, including dividends. This equated to a total return for the year of +17.9%. Small-cap stocks (as measured by the S&P 600) were positive again, after a very strong 2Q, but trailed large-caps for the quarter finishing up +1.7% leaving the 2025 annual return at +6.0%. Performance outside the US closed out its best year since 2009 in strong fashion with Developed International Markets, rising +4.9% for the quarter (as measured by the EAFE Index) while Emerging Markets (EM) posted a similar gain of +4.8% for the period (measured by the MSCI Emerging Market Index). For the year, these geographies were up +32.0% and +34.3%, respectively. Putting the US and International Markets together, the MSCI All-Country World Index (ACWI) finished higher by +3.4% for the quarter and was up +22.9% YTD. It’s worth noting that we did see a move back to more concentration at the top of the market late in the year, with the equal-weight ACWI rising just +2.0% for the quarter.

From a sector perspective, 9 of 11 economic sectors of the market were positive for the period while only 2 of 11 outperformed the broader market (S&P 500). Healthcare (+11.7%) and Communication Services (+7.3%) were the top two, followed by Financials (+2.0%), Energy (+1.5%) and Technology (+1.4%). It’s worth noting that Healthcare was in last place, heading into 4Q25. At the bottom for the most recent period, Consumer Discretionary (+0.7%), Consumer Staples (0.0%), Utilities and Real Estate all finished below 1% with Utilities (-1.4%) and Real Estate (-2.9%) the only negative sectors. For the twelve months ending December 31, 2025, all 11 sectors were in the green but only 3 of 11 outperformed the broader market. Communication Services (+33.6%), Technology (+24.0%), Industrials (+19.3%), Utilities (+16.0%) and Financials (+15.0%) were the top 5 performers. Healthcare (+14.6%) jumped up to sixth place after the strong showing in 4Q. Energy (+8.7%), Consumer Discretionary (+6.0%), Consumer Staples (+3.9%) and Real Estate (+3.2%) occupied the cellar for the year.

Examining the factors for the 4Q and YTD, they were mixed by market cap. For example, Value was positive, albeit lagging, in large-caps while showing double-digit negative performance YTD in small and mid-cap spaces. Similarly, Size was a positive factor for Large-cap but a negative in small and mid-cap areas. On the other hand, Dividends were a negative factor across spaces while Volatility was a consistently positive factor that drove market performance for the quarter and the year. The Profitability factor showed a negative bias while Momentum was consistently positive for the year. We discussed last quarter, that investors appeared to be utilizing a barbell approach in going for the largest of the large and the smallest of the small while favoring more volatility vs. less. For our strategies, the factor backdrop was mixed but stock selection provided a strong tailwind to the absolute and relative performance in our Large-cap strategy for the quarter and the year, outperforming in all four quarters. The Dividend & Income strategy lagged the broader market as Dividends and Value were out of favor, however, we did well relatively for the quarter. For the year, the strategy provided a solid absolute return but lagged relatively as several large index holdings performed better than expected. Our Small/Mid-cap portfolios trailed absolutely and relatively for the year due to the market shift to smaller/non-profitable names (away from our portfolio positioning in this space). Finally, our International ETF portfolio performed in-line with very strong returns outside the US.

We closed last quarter’s write-up with the following: “Many in the market today are trying to maximize returns. We believe this is a time to equally manage risk. We continue to look for the opportunities presented by individual name fluctuations but want to be cognizant of potential headwinds of high valuation and market players that may be partying a little too hard at the moment.” On this front, we did see some air come out of the riskiest corners of market while more traditionally defensive areas like Healthcare outperformed in the fourth quarter. Nevertheless, we believe there could be more of this to come as we enter 2026. As we have noted before, mid-term election years have a history of providing some twists and turns, particularly in the second and third quarters of the year. The news over the weekend around Venezuela highlights that geopolitical risks remain prevalent. While earnings and the economy remain resilient, valuations remain elevated by historical standards. As Captain Jack Ross (Kevin Bacon) said in A Few Good Men, “These are the facts of the case and they are undisputed.” However, we will continue to look for opportunities and clues as we move through what will undoubtedly be an “entertaining” year. For now, price remains truth.

The yield on the 2-Year Treasury Note was lower by 14 basis points (bps) for the quarter to 3.47% producing a total return of 1.09%. Its yield is sharply lower than the start of the year – down 77 bps, resulting in a total return of 4.85%. The 10-Year Treasury Note finished the quarter with a yield of 4.17%, which is 2 bps higher on the quarter, but 40 bps below the level at the start of the year. This equates to total returns of 0.83% and 7.82%, respectively. The difference between the 10-Year and the 2-Year is the widest level since the beginning of 2022 at 69 bps.

The corporate bond market performed in-line with Treasuries this quarter but retained a commanding lead for the year. The yield spread over Treasuries of the Bloomberg Intermediate Corporate Index finished the quarter a touch wider at 70 bps but remains near historically tight levels. The overall yield of this index is 4.42%. The return for this index was 1.29% in the fourth quarter which moved the annual return to 7.95% – runner-up for the best annual period in the last twelve years. Bonds of all ratings categories performed similarly for the quarter, but those of lower-rated companies continued to outperform higher-rated ones for the year. For example, the high yield index outperformed the investment-grade index by nearly 100 bps for the year. Bonds of utility companies outperformed those of financials and industrials by 15 bps and 35 bps in 2025, respectively. There were several moments during the 4th quarter where credit spreads widened, but each was met with more buying. We continue to expect volatility in credit spreads that will provide better opportunities to add high quality corporate bonds to the portfolios.

Similar to taxable bonds, municipals advanced at a more modest pace this quarter though ending the year with the second-best return since 2011. The Bloomberg 5-Year Municipal Index had a total return of 0.50% and 5.03% for the quarter and year, respectively. The yield ratio to Treasuries (a measure of relative value) is 64%, near the same level where it started the year and the lower end of its historical range. On balance, the tax changes that go into effect from the One Big Beautiful Bill Act will lower demand for municipal bonds. 2025 was a record year for municipal issuance that eclipsed $600 billion. Continued infrastructure needs and a large quantity of refinancing opportunities project a new issuance record in 2026. The municipal yield curve remains steeper than its taxable counterparts. There are attractive yield opportunities for those in higher tax brackets who don’t mind maturities greater than 15 years.

Most bond indexes had stellar returns this year. In general, we maintained less duration than the index and that detracted from returns, most notably in the corporate bond sector. We maintained more exposure to corporate bonds but have been reducing this percentage at these historically narrow spread levels. The most likely scenario for 2026 is a steeper yield curve that favors higher quality given the amount of debt outstanding. However, if inflation measures continue to trend lower and the labor market weakens further, demand for bonds will push rates lower.

The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.  The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.