During the week, market ambiguity prevailed despite expectations for clarity regarding jobs, tariffs, and rates. December payrolls added 50,000 jobs while unemployment fell to 4.4%, maintaining the status quo for Federal Reserve action. The anticipated tariff decision was deferred, suggesting a more nuanced future judgment. Equities rose with small caps surging over 5%, driven by an aggressive short squeeze, while sectors rotated in response to nominal growth trends.
In the bond market, long-end bonds outperformed, flattening the curve as enthusiasm for immediate rate cuts faded; 2-year yields rose slightly, suggesting January easing is unlikely. The dollar reached a one-month high, while gold increased near record levels, reflecting confidence in fiscal policies. Oil saw price hikes due to Iranian tensions, introducing a risk premium. Bitcoin remained static, reflecting a period of consolidation amid asset rotation and selectivity.
Productivity As A Key US Economic Driver
Productivity, rather than payroll, is emerging as a key US economic driver, with business productivity surging by 4.9% in Q3. This increase has occurred with minimal changes in labor input, indicating an efficiency-led growth. Hourly compensation growth slowed to 3.2%, supporting a disinflationary environment. Consequently, productivity, not labor force expansion, is increasingly critical to GDP growth, leading to potential policy shifts.
Global stocks are projected to rise by 11% over the next 12 months, yet with less momentum than previous years. Valuations remain historically high across regions, suggesting returns may rely more on profit growth than valuation increases. Diversification across styles, sectors, and regions is forecast to continue benefiting market participants in 2026, extending to various investment factors such as growth and value.
The market is sending a clear signal that broad index bets are a mistake right now. We see dispersion is high, which means stock-specific moves are overpowering the general market trend. The CBOE Implied Correlation Index has recently fallen to its lowest level since before the 2024 election cycle, confirming that it’s a stock picker’s environment.
Relative Value Trades And Market Conditions
This is a time for relative value trades, especially playing the rotation out of last year’s winners. We saw the Russell 2000 outperform the Nasdaq 100 by over six percentage points last week, its strongest divergence in over a year. Using options to bet on small-cap strength against mega-cap tech weakness looks like the most direct way to ride this shift.
The Federal Reserve is not going to act soon, so we should not fight the stable front end of the yield curve. Fed funds futures are now pricing in less than a 10% chance of a rate cut before March, but still anticipate two cuts by the end of 2026. This suggests selling volatility on short-term rates while expecting the long end to remain sensitive to growth data.
With this setup, volatility itself has become a trading instrument. The VIX term structure shows this, with the front-month contract closing near 13 while the six-month contract is trading above 17. Selling near-term options to collect premium while buying longer-dated protection seems prudent.
We should also isolate commodities, as they are marching to their own beat. Gold futures added 1.5% last week even as the Dollar Index climbed towards 104.50, telling us its strength is independent. Meanwhile, Brent crude’s front-month contract is trading at a $3 premium to the six-month contract, reflecting urgent geopolitical fears that are best played with short-term call options.
