Markets Will Soon Refocus on the Economy

Activities around Venezuela have been distracting for markets this week.

Folks are concerned that the action could lead to further geopolitical and economic uncertainties ahead, and it’s all anyone can focus on.

But while markets try to make sense of the situation and assess which stocks should gain, attention will soon shift back to the U.S. economy…

Because there’s a swathe of key economic data coming down the pipe.

All have the potential to move the needle around rate expectations… thus impacting how markets may track in the first half of this year.

So let’s see what lies ahead…

Jobs and Inflation

One of the key takeaways from the Fed’s last meeting was the reticence from several members to further cut rates.

The Fed implemented three consecutive rate cuts – including a cut at the December meeting – to help prop up the jobs market. It now wants to see how those cuts are permeating throughout the economy… And whether inflation will start tracking lower, as progress had stalled in the second half of last year.

If you can believe the numbers, core consumer price index (CPI) inflation for November came in well under market expectations – 2.6% year-over-year versus 3% forecasts. We’ll get a chance to see December’s CPI data next week.

And on the jobs front, we have the latest Job Openings and Labor Turnover survey (JOLTs) data due later today. September and October’s delayed readings off the back of the government shutdown easily beat expectations and were their highest reading since May 2025.

But the biggest refocus in attention should come this Friday when nonfarm payrolls (NFPs) and unemployment data are released…

NFP data has been highly erratic since April last year. It’s oscillated between net job gains and losses with the November print beating expectations, clocking in at plus 64,000 versus the 50,000 forecast. That came after October’s adjusted 105,000 loss.

Data on the unemployment rate will offer us some real insight into the health of the economy.

Data that followed the Fed’s December rate cut decision showed that the unemployment rate for November had risen to 4.6%… 0.2% higher than the previous print and consensus forecasts of 4.4%. It was also the highest unemployment print since September 2021.

Despite the Fed’s hesitation, any further deterioration could have the markets – and not to mention the White House – soon agitating for further cuts…

Thematic Shift

Despite those successive rate cuts, a lot of the heat came out of the markets in the final months of last year…

Big drivers of the rally – like Nvidia (NVDA), Palantir (PLTR), Meta Platforms (META), and Microsoft (MSFT) – finished out the year trading well off their highs. Those rate cuts were unable to sustain their already overextended rally.

Meaning that even if the Fed were to cut rates – unlikely as that may be, for now – there’s no guarantee those mega tech stocks would regain their lost momentum. And if the coming data pushes the prospects of a rate cut further off the table, they’ll instead come under further pressure.

That’s why I urge investors to remain incredibly cautious. Even passive exchange-traded funds (ETFs) are heavily exposed to the tech sector.

And if you’re heavily exposed to those Big Tech stocks, it might be time to consider lightening some of your holdings. Because apart from those stocks remaining overstretched and vulnerable to a correction, we’re also seeing ongoing rotation out of tech into older-style industrial stocks.

I’m expecting volatility to pick up a lot this year. With the markets, you’ve always got to look forward. Meaning you don’t want to get caught overexposed to last year’s AI-based theme.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict