DAILY STRATEGY: Our longer-term market views are risk positive. Less monetary policy easing is not inherently negative for markets if the labor market remains stable, growth stays firm, and core inflation (excluding tariff effects) is below 2.5%. The effective tariff rate appears to be trending lower (by policy, most recently evidenced by grocery tariff reductions, and courts) which will lift real incomes and support economic growth as OBBB provides an additional tailwind in 1H26.
However, the setup into year-end is tricky: there’s no strong case to buy aggressively, but it’s also not a clear shorting environment. Markets will remain “violently flat,” with sharp moves but no real direction short term. Uncertainty around AI capex returns for leveraged names (e.g., ORCL, Private Equity) likely won’t clear up until January earnings. Messy data is driving narrative-based trading that can swing hawkish or dovish, and there is a lot of data coming over the next couple months. The Fed is still expected to cut toward ~3% over time, but the committee is already split and that may muddle Fedspeak. Speculative stocks look overextended after a 99th percentile run-up, but we would take advantage of oversold conditions to buy high-quality cyclicals. Strong fundamentals will work best in a muddle-through.
If the data ends up cleaner than we expect and/or there are data points that assuage AI capex concerns (looking at you, NVDA), go long small caps. Small caps did outperform yesterday in a down tape. Keep in mind small cap vol is elevated thanks to the growing contribution of speculative small caps to returns, but if things break the right way, they have a lot of upside after falling – Jeff Jacobson, 22V Derivatives specialist, put together an options trade to go long small caps: buy IWM Dec 31st 245 calls for $2.85 (IWM 232.60 ref).
Quickly on Fed chairs… Trump’s latest comment that the administration “may go the standard way” on the Fed chair selection appears to have modestly boosted Waller’s odds on Polymarket, though Hassett remains the frontrunner. This continues to look like a Waller (dovish, conventional) versus Hassett (dovish, slightly more unconventional but with a more traditional background) race.
LABOR DATA – ADP data improved on a four-week basis ( -11k to -2.5k) but was still slightly negative. The odds of a December rate cut are still roughly 50%, with ADP not materially shifting expectations. Peter Williams, 22V Economist, notes ADP sees sequential hiring rising, but net hiring looks weak because retirements and workforce aging offset gains.
BANKS – 22V’s technical analyst, John Roque flags “advancing correction” traits in market internals and breadth. 22V Financials analyst, Bill Hebel, notes that if the economy can handle fewer cuts, it’s ultimately constructive for financials, though likely more of a 2026 story. XLF is holding its 200-day while KRE has broken below it. Still, benign credit conditions, supportive regulatory trends, and improved capital frameworks are positive for financials, and the Fed’s recent pushback has steepened the belly of the curve since earnings, aiding fixed-rate repricing. These dynamics should help the sector over time for patient investors.
Charts below….
We don’t have a compelling reason to aggressively buy right now, nor is this a clear environment for pressing shorts. Rather, it feels like a “violently flat” trading regime of sharp swings without durable direction. Oversold conditions support cyclical names with strong fundamentals, but speculative tech has run up unusually fast and now trades at stretched valuations.
Small caps have begun diverging positively. Coming into yesterday, IWM had retraced much of its relative underperformance. While this could align with firmer economic data, we need to see it persist.
Given the choppy environment, short-term trading observations are particularly relevant. Jeff Jacobson, our head of options strategy, recommends buying IWM Dec 31st 245 calls for $3.00 (IWM ref 233.45 ref). These 27-delta calls offer limited risk and six weeks of duration. Implied vol is elevated but justified by realized vol. Importantly, IWM traded above 245 less than a week ago and has sharply lagged SPY and QQQ, creating catch-up potential if markets rebound into year-end as cleaner data arrives.
LABOR MARKET – ADP data yesterday morning was “less bad” on the four-week trend, improving from -11k to -2.5k, though still negative overall.
FINANICALS – Technically, XLF is holding its 200-day while KRE has broken below it. Still, benign credit conditions, supportive regulatory trends, and improved capital frameworks are positive for financials, and the Fed’s recent pushback has steepened the belly of the curve since earnings, aiding fixed-rate repricing. These dynamics should help the sector over time for patient investors.
Quickly on the Fed… The Fed chair selection appears to be Waller vs Hassett, although Hasset is the main front runner.
