Monthly Economic and Market Summary

• International Outperforms Domestic Equities—The S&P 500 index eked out a modest 0.06% gain in December, bringing third quarter and fullyear 2025 returns to 2.65% and 17.86%, respectively. Markets were broadly positive throughout the year, with nearly all equity and bond indices reporting growth. International equities were the standout, outperforming domestic equities, following a period of heightened volatility earlier in the year.

• Fed Cuts Rates (Again) in December—The Federal Reserve cut interest rates by 25 basis points at the December FOMC meeting, marking the third rate cut in 2025. The Committee noted elevated uncertainty around the economic outlook and cited increasing downside risks to employment. Current expectations are for the Fed to cut rates twice in 2026.

• Unemployment Ticks Up—Payroll employment rose more-than-expected by 64,000 in November after declining 105,000 in October. The October data reflected DOGE-related government resignations. The unemployment rate rose to 4.6% in November, the highest since 2021, suggesting a softening labor market.

• November Consumer Price Index (CPI) Better Than Expected— November CPI rose at an annual rate of 2.7%, below consensus expectations of 3.0%. Though overall inflation seems to be moving in the right direction, recent data points remain scarce with no CPI data collected for the month of October due to the U.S. government shutdown.

• 3Q Gross Domestic Product (GDP) Exceeded Expectations​​​​​​​—The initial release of third quarter GDP came in at a 4.3% annualized rate and above consensus expectations for 3.3% growth. The U.S. economy continues to benefit from strong growth in consumer spending and a lower trade deficit.

The power of asset allocation

Asset allocation is the strategy of diversifying investments across different asset classes, such as stocks, bonds and cash to balance risk and return. This approach is currently top of mind for investors, as AI-themed stocks-led by the “Magnificent Seven”-now account for over one-third of the S&P 500’s total market capitalization. In a concentrated and unpredictable market, asset allocation is less about timing market peaks and more about surviving the valleys. The primary goal of asset allocation is to avoid keeping all your eggs in one basket and instead aiming for smoother, more consistent returns over time through a well-diversified portfolio.

Often cited as the “gold standard” for balanced investing, the 60/40 portfolio illustrates the power of asset allocation. By combining a 60% equity stake for long-term growth with a 40% fixed-income allocation, this model aims to capture market gains while providing a cushion against volatility of the stock market. Morningstar put the portfolio to test analyzing the downside protection during three different periods in history: the Great Depression, the 1970s with high inflation, and The Lost Decade (Dot-Com and Great Recession) period. During these three periods, the stock market was down 79%, 51.9% and 54%, respectively. In contrast, the 60/40 portfolio mitigated the downside, posting comparatively modest declines of 52.6%, 39.4% and 24.7%.

While there is no perfect asset mix to shield against losses, diversification can play an important role in smoothing out returns over time, allowing investors to stay disciplined through market cycles. The chart below from Vanguard illustrates that calendar-year returns can vary widely across different asset allocations. Higher equity exposure historically delivers greater long-term return potential, but with significantly wider ranges between best- and worstyear outcomes. A more balanced approach, such as a 60/40 portfolio, helps moderate both extremes. The inherent unpredictability of asset class returns reiterates a fundamental truth: asset allocation diversification remains a reliable path for navigating market uncertainty over the long-term