The Dow Jones Industrial Average increased by 420 points, driven by optimism that the Federal Reserve may cut interest rates again in December. This shift followed earlier declines due to weak ADP jobs figures and downgraded sales expectations in Microsoft’s AI divisions.
ADP Employment Change reported a 32,000 decrease in jobs for November, contrasting with the previous month’s 47,000 increase and a forecast of 5,000. The ADP data has been volatile and does not closely align with official figures, which remain delayed due to a US government funding shutdown.
The FedWatch Tool
The CME’s FedWatch Tool indicates a near 90% likelihood of the Federal Reserve cutting interest rates in December. Concurrently, there is still an 80% likelihood of a rate cut being postponed to January, reflecting market uncertainty amid declining US job data.
US Industrial Production rose slightly by 0.1% in September, although prior numbers were revised downward to -0.3%. S&P Global reported a decrease in business expectations with its Composite PMI dropping to 54.2 from 54.8.
Microsoft’s AI divisions have lowered sales expectations due to weaker demand. This rare adjustment in sales targets saw Microsoft shares fall by 2.28%, recovering slightly but still closing down on the day.
With markets rallying on bad economic news, we see a clear short-term opportunity. The nearly 90% probability of a Fed rate cut on December 10th suggests we should consider buying short-dated call options on major indices like the SPY and QQQ. This is a classic “bad news is good news” trade, betting that the anticipation of cheaper money will continue to lift equities into the Fed meeting.
Impact Of Labor Market Data
The crumbling labor market data from ADP is being reinforced by other recent statistics, making the case for a rate cut more compelling. For instance, initial jobless claims have been trending upward for the past month, now sitting at a 10-month high of 252,000. We saw a similar dynamic in late 2018 when fears of a slowdown forced the Fed to pivot from tightening, which ultimately sparked a major rally.
However, the Federal Reserve meeting itself introduces significant event risk, so we should also prepare for a spike in volatility. The VIX, a measure of expected market volatility, has seen its futures curve for January steepen considerably, indicating traders are bracing for turbulence post-announcement. We can look at buying a straddle on the SPY, which would profit from a large price swing in either direction after the Fed makes its decision.
The weakness in Microsoft’s AI sales divisions is a significant warning sign for the tech sector, which has led this year’s market gains. This news isn’t happening in a vacuum; recent reports show that enterprise spending on experimental tech projects for the fourth quarter of 2025 is down 15% from the previous quarter. Therefore, we should consider buying put options on the QQQ ETF or other AI-focused stocks as a hedge against a potential tech-led downturn.
Ultimately, we must remember that the Fed only cuts rates when the economy is genuinely faltering. While the market is celebrating the potential for a cut now, the underlying economic weakness could eventually weigh on corporate earnings and investor sentiment. This suggests any rate-cut rally could be short-lived, making it wise to be prepared to take profits quickly and establish more defensive or even bearish positions for early 2026.
