Quarterly Economic Update
Fourth Quarter 2025
Equity markets closed out the fourth quarter of
2025 on a strong note, buoyed by an interest
rate cut from the Federal Reserve in December.
Delighting investors, 2025 marked the third
consecutive year in which equities delivered
double-digit returns. This extended bull market
was powered largely by three federal rate cuts
during the second half of the year, robust AI-
driven technology earnings, and broadly
positive investor sentiment.
During the fourth quarter, inflation continued to
show incremental signs of easing, while
economic
growth
remained
resilient,
contributing to an environment often described
as the “Goldilocks” scenario. This balance of
moderating inflation and steady growth helped
maintain investor confidence throughout the
quarter.
The S&P 500 continued to experience new
highs during the fourth quarter. The S&P 500
gained 2.4% in the fourth quarter, closing 2025
at 6,845.50, marking a roughly 16% gain for the
year. The Dow Jones Industrial Average (DJIA)
closed the quarter up 4.5%, ending at
48,063.29 and up approximately 13% for the
year. (Source: Morningstar.com; cnbc.com)
Equity market conditions remain strong and
investor sentiment is largely bullish, although
there are some underlying risks that warrant
close attention. A decelerating labor market,
historically high stock valuations, potential
(252) 451-0488
www.StrategicFreedom.com
Anthony (Tony) Engrassia, ChFC, LUTCF, NSSA®
Certified Financial Fiduciary®
overextension in AI and technology stocks, and
economic uncertainty, may weigh on investor
enthusiasm and returns moving forward.
According to the U.S. Bureau of Labor Statistics,
the unemployment rate for November 2025 rose
to 4.6%. This is up from September’s data of
4.4% (October data, as of the writing of this
newsletter, was delayed due to the government
shutdown). Unemployment is now at the highest
rate it has been since 2021. This data suggests
that the labor market might be on a weakening
trend.
Many analysts feel that 2026 will be another good
year for equity markets. Prominent Wall Street
strategist Tom Lee expects 2026 to mirror much
of 2025, with intermittent volatility followed by a
potential year-end rally. Looking ahead, whether
markets can achieve a fourth consecutive year
double-digit returns remains uncertain. (Source:
marketwatch.com, 12/11/25)
Overall, the data continues to support a watchful
but constructive long-term outlook for equities.
As always, investors need to carefully choose
portfolios that represent their unique objectives.
Our role as financial professionals is to closely
monitor market developments and ensure our
clients’ portfolios remains aligned with their time
horizon, risk tolerance, and financial objectives.
We remain committed to keeping them informed,
proactive, and well-positioned to navigate
evolving market conditions with confidence.
Inflation & Interest Rates
Key Points:
• Interest rates were lowered by 50 basis
points in the fourth quarter, resting at 3.5
- 3.75%, for a total of three consecutive
rate cuts since September.
KEY TAKEAWAYS
• Equities continued to reach record
highs in the fourth quarter. The rally
was fueled primarily by additional
easing of monetary policy, the AI boom,
a
resilient
labor
market,
and
consistently strong corporate earnings.
• In the fourth quarter, The Fed reduced
the federal funds rate twice by a total
of 50 basis points to finish the year at a
range of 3.5-3.75%, with the potential
of additional, but slower, cuts next
year.
• Inflation numbers came in better than
expected and in November, the
Consumer Price Index rose 2.7%.
• Bonds were relatively muted during the
quarter.
• While investor sentiment remains
positive, we continue to monitor
potential disruptors.
• Focusing on your long-term goals and
staying the course of a well-guided plan
can help you stay grounded and
confident during these times of
uncertainty.
• We are here for our clients! Their
financial well-being is always our
priority.
• The Fed ended the year forecasting
rate cuts in 2026, although at a
slower pace than we experienced
this quarter.
• The core CPI, which does not
include food and energy prices, was
cooler than anticipated, increasing
2.6% over 12 months.
The Federal Open Market Committee
(FOMC) lowered interest rates in October
for the second time in a row. Then, during
the last meeting of the year in December,
the committee members had to make a
decision on interest rates without complete
economic data for October and November. The
committee had to operate and make decisions
based on data that was behind schedule or
unavailable, due to the government shutdown
that ended November 12. With the information
available that showed a good economic
landscape, the FOMC voted to lower interest
rates once again. The December rate cut
represented the third in a row, bringing the rate
range to 3.5 – 3.75%. Equity markets reacted
positively to this news, with major indexes
reaching record highs. (Source: finance.yahoo.com,
9/18/25)
Looking ahead, the Fed anticipates there could
be additional rate cuts, but they are not
guaranteed. The committee is beginning to have
a more hawkish outlook, but the third reduction
put the Fed in a comfortable position. Fed
Chairman Powell said, “We’re in the high end of
the range of neutral,” He also added, “It so
happened that we’ve cut three times. We haven’t
made any decision about January, but as I said,
we think we’re well positioned to wait and see
how the economy performs.” (Source: cnbc.com,
12/10/25)
“In considering the extent and timing of additional
adjustments to the target range for the
federal funds rate, the Committee will
carefully assess incoming data, the
evolving outlook, and the balance of
risks,” was the message in the
December FOMC statement.
Vital
economic
data
was
finally
released on December 18 after being
delayed by the government shutdown.
The most recent Bureau of Labor
Statistics data for consumer prices
came from November, when the annual
rate rose by 2.7%, lower than expected.
The core Consumer Price Index (less
food and energy) rose 2.6%. Economists polled
by the Dow Jones were surprised by this result,
as they had anticipated the CPI to rise to 3.1%.
(Source: cnbc.com; 12/18/25)
Equities responded very well to this data which
incited optimism that inflationary pressures
could prompt the Fed to continue to ease
monetary policy at an appropriate pace.
The December 18 news release by the Bureau of
Labor Statistics showed year-over-year, food
showed a gain of 2.6% while energy increased
4.2%. Shelter costs increased 3.0%.
Movements in interest and inflation rates are
critical for investors' financial planning, and
we will continue to closely monitor these key
economic indicators.
The Bond Market and
Treasury Yields
Key Points:
• The fourth quarter of 2025 was relatively
calm for the U.S. bond market.
• Bond behavior continues to hinge on the
direction of interest rates. Should the Fed
pursue additional rate cuts, existing
bonds
could
appreciate
in
value.
Conversely,
expectations
of
slower
easing or persistent inflation pressures
could push yields higher.
During the fourth quarter, the U.S. Treasury
market demonstrated cautious behavior relative
to equities. Although the Federal Reserve’s
December rate cut supported risk assets,
treasury yields remained elevated, reflecting
investor concern over inflation durability and
economic strength.
As the quarter ended, the 10-year Treasury
yielded 4.18%, the short-term 2-year Treasury
was 3.47% and the 30-year Treasury yielded less
than a basis point lower at 4.84%. (Source:
treasury.gov resource center)
In basic terms, when bond prices rise yields fall;
when prices fall, yields rise. In late 2025, long-
term yields have slightly drifted higher from
earlier in the year, suggesting that investors may
be pricing in a mix of slower rate easing, sticky
inflation expectations, and moderation in growth.
For investors, bonds can still play a meaningful
role in diversification, providing relative stability
during periods of equity volatility. However, it’s
important to remember that bond investments
must be evaluated in the context of your
individual risk tolerance, investment horizon, and
financial goals. Bonds remain a core component
of many well-balanced portfolios, helping to
mitigate risk and provide income. Nevertheless,
diversification does not guarantee profits or
prevent losses, and we will continue to monitor
the
fixed-income
landscape
closely
as
conditions evolve.
Investor’s Outlook
Key Points:
• The bull market is expected by most
strategists to extend into 2026.
• Market volatility is likely to persist,
making
discipline
and
perspective
essential.
• Volatility can create opportunities for
long-term investors.
• Maintaining
a
long-term
focus—and
avoiding short-term distractions—has
historically been one of the most reliable
ways to achieve financial goals.
Experience imparts wisdom and broadens an
investor’s perspectives. After the S&P 500
endured a drawdown of almost 20% in the first
half of 2025, patient, non-emotional, well-
disciplined investors were rewarded with new
highs and robust returns in the second half of the
year.
After a healthy fourth quarter for investors, we
feel good about our portfolios. We still enter the
new year with some lingering questions
including, will 2026 be able to deliver another
strong year of returns for the fourth consecutive
year?
Analysts are optimistic about 2026, with a
consensus that year-end returns will be positive,
however, investors are aware that market
pullbacks occur on average every year and a half,
so we must remain prepared. If 2025 taught us
anything, it’s that during challenging times, it’s
best to avoid emotional decisions. Although
history is not a forecast of future outcomes, in
2025 the equity market rewarded investors who
demonstrated patience and discipline during
tough times.
As we begin 2026, there are numerous concerns
that are reasons for investors to be cautious.
While we are optimistic about the opportunity for
another positive year in 2026, there are still many
uncertainties to consider.
Many analysts feel that the Federal Reserve’s
monetary policy trajectory will set the tone for
global markets in 2026. The second half of the
year will bring the appointment of a new Fed
chairman. Dennis Dick, chief market strategist at
Stock Trader Network, shares that, “The next Fed
Chair is probably going to be much more dovish
than Jerome Powell, so I would imagine that we
actually see in the second half of this year that
interest rates go down substantially.”
The continuation of tariff talks and the possibility
of a struggling economy could also cause issues
in the first half of 2026. High valuations mean that
any earnings disappointments could also disrupt
the recent upward trajectory of equity markets.
Additionally, geopolitics in several regions are at
a challenging point and could lead to more
uncertainty, which always seems to disrupt
equity markets.
Statistically, speaking, investors should be
prepared for a potential correction of 10% or
more at some point in 2026, but as analyst
estimates share almost every major institution
feels that by year-end, we will see markets
higher.
2026 is a midterm election year and that
historically has created increased uncertainty, as
investors
assess
potential
changes
in
Congressional control and their implications for
taxes, spending, and regulation.
Geopolitical conflict also remains a concern.
Ongoing conflicts, such as instability in the
Middle East. the war in Ukraine, South America’s
issues and the continued rivalry among major
global powerhouses, including China and Russia,
continue to contribute to an unclear global
environment.
While uncertainties remain, our focus continues
to be on the factors most relevant to your
personal financial situation. Many analysts still
see the potential for the bull market to extend
into 2026, supported by easing monetary policy
and
continued
momentum
in
artificial
intelligence and innovation. At the same time,
high valuations and a complex political
environment—both
domestically
and
internationally—suggest that volatility is likely to
remain a feature of the market.
Rather than viewing volatility solely as a risk, it
can also be seen as a potential opportunity.
Periods of market weakness can present
openings to invest at more attractive prices,
rebalance portfolios, or harvest losses to help
offset capital gains.
For now, we can appreciate the benefits of the
current
bull
market
while
continuing
to
emphasize our guiding principle: proceed with
caution.
A new year always brings the opportunity to
review your expenses thoughtfully and we still
recommend
making
informed
financial
decisions. Proactive preparation can help you
maintain a well-structured financial strategy
designed to weather a wide range of market
environments. From an investment standpoint,
equities remain a long-term commitment, and
our disciplined, long-term strategy continues to
be a cornerstone of prudent investing.
Here are some proactive planning reminders:
•
Consider IRA contributions for tax year
2025: Contributions can still be made
until April 15, 2026. This is also a good
time to let us know if you are considering
changes to your estate plan and
beneficiary designations.
•
Life changes and important milestone
“birthdays”: Please notify us of any
anticipated changes, such as retirement,
estate planning updates, and remind us of
significant age-based milestones.
•
Cash flow evaluation: Review your 2026
spending and savings plan to reflect
upcoming goals and expected changes.
Maintaining adequate cash or short-term
reserves can help cover near-term
expenses.
•
Portfolio rebalancing: We try to use
periodic rebalance as a strategy for
helping keep your portfolio aligned with
your risk tolerance, time horizon, and
goals. The beginning of the year is an ideal
time
to
confirm—or
adjust—your
objectives if your circumstances have
changed.
We believe an informed client is the best client.
Our commitment is to exceed our clients’
expectations in 2026 by delivering exceptional
service, maintaining consistent, meaningful
communication throughout the year, and
proactively planning to help them navigate the
changing economic environment.
As our clients’ financial stewards, we will
continue to monitor the economic landscape and
areas that we believe are important to their
financial well-being. Key items we will be
watching in 2026 include:
• Inflation trends
• Interest rates and the path of monetary policy
• Corporate earnings and profit margin trends
• Overall economic health, including
unemployment data
• Geopolitical developments and policy
changes
We will keep our clients informed about
developments that could impact their personal
situation.
If you would like to explore our services,
please contact us. We always recommend
discussing any potential changes, concerns, or
ideas that you may have with a qualified financial
professional prior to making any financial
decisions so they can help you determine your
best strategy and make sure your plan is still
aligned with your goals.
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advisor does not imply a certain level of skill of training. Wealth Management Strategies and PCA are separate, non-affiliated entities. PCA does not provide tax or legal
advice.
Sources: usbank.com; hbls.gov; factset.com; yahoofinance.com; cnbc.com; federalreserve.com; Morningstar.com; bls.gov; U.S. Department of Treasury.
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