During the week, the market was uncertain, even though people hoped for more clarity on jobs, tariffs, and interest rates. December payrolls added 50,000 jobs, and unemployment dropped to 4.4%. This suggests that the Federal Reserve is likely to keep its current policy. The expected decision on tariffs has been postponed, indicating a more careful approach ahead. Stocks gained ground, with small-cap stocks rising more than 5% due to a strong short squeeze, while sectors shifted based on moderate growth trends. In the bond market, long-term bonds performed well, leading to a flatter yield curve as interest in immediate rate cuts decreased; 2-year yields rose slightly, indicating that a rate cut in January is unlikely. The dollar hit a one-month high, and gold prices increased, close to record levels, reflecting confidence in financial policies. Oil prices went up due to tensions with Iran, adding a risk premium. Bitcoin stayed steady, showing a phase of consolidation amid shifts in assets and selectivity.

Productivity As A Key US Economic Driver

Productivity, rather than payrolls, is becoming a major driver of the US economy. Business productivity surged by 4.9% in Q3, with little change in labor input, highlighting growth through efficiency. Hourly compensation growth slowed to 3.2%, contributing to a disinflationary environment. Thus, productivity, rather than workforce growth, is becoming more crucial for GDP growth, which could lead to policy changes. Global stocks are expected to increase by 11% in the next 12 months, but with less momentum than in previous years. Valuations are still historically high in many regions, implying that returns may depend more on profit growth than on rising valuations. Investors can continue to benefit from diversifying across styles, sectors, and regions, particularly with factors like growth and value in 2026. The market clearly indicates that broad index bets are risky right now. The high dispersion shows that specific stocks are moving more than the overall market. The CBOE Implied Correlation Index has dropped to its lowest level since before the 2024 election cycle, confirming that this is a good time for stock picking.

Relative Value Trades And Market Conditions

Now is the time for relative value trades, especially as we see a shift away from last year’s top performers. Last week, the Russell 2000 outperformed the Nasdaq 100 by over six percentage points, its largest difference in over a year. Betting on small-cap strength against weak mega-cap tech stocks seems like the best way to capitalize on this shift. The Federal Reserve is unlikely to take action soon, so it’s wise to avoid betting against the stable end of the yield curve. Fed funds futures are now pricing in less than a 10% chance for a rate cut before March but still expect two cuts by the end of 2026. This suggests selling volatility on short-term rates while anticipating that long-term rates will react to growth data. In this setting, volatility itself has become a tradeable asset. The VIX term structure reflects this, with the front-month contract closing around 13, while the six-month contract is above 17. Selling near-term options to collect premiums while buying longer-term protection looks sensible. We should also focus on commodities, as they are moving independently. Gold futures rose by 1.5% last week, even as the Dollar Index climbed towards 104.50, showing its strength is separate. Meanwhile, Brent crude’s front-month contract trades at a $3 premium to the six-month contract, reflecting urgent geopolitical concerns that might be best addressed with short-term call options. Create your live VT Markets account and start trading now.

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