The “Missing” Data That Scares the Fed
If you have been looking for clarity in the financial headlines lately, you might have noticed it is in short supply. We are currently watching a fascinating staring contest between economic data that looks decent on the surface and the underlying numbers that suggest the engine is sputtering. It is late 2025, the government has finally reopened, and we are flooded with data that is confusing at best and contradictory at worst.
The Federal Reserve seems just as divided as the rest of us. We have a classic standoff happening right now between the Hawks, who are terrified inflation is lurking in the shadows, and the Doves, who are worried the labor market is cracking under pressure. It is a bit like watching a weather forecast where one meteorologist predicts a drought while the other predicts a flood, and they are both looking at the same cloud. This uncertainty makes for a messy December meeting, but it provides plenty of opportunities for the astute investor.
This Week I Learned…
Decoding the Jobless Numbers
This week, we are diving into a concept that is currently causing a massive headache for the Federal Reserve members: the difference between “Cyclical” and “Structural” unemployment. You will hear these terms thrown around in financial reports often, especially when the job market sends mixed signals like it is doing right now.
Cyclical unemployment is the type we usually worry about during a recession. It happens when demand for goods and services drops, businesses earn less, and they cut staff to save money. If the economy bounces back, these jobs usually return. It is a demand-side problem.
Structural unemployment is different and much stickier. It happens when there is a mismatch between the jobs available and the skills or location of the workers. In our current context of late 2025, some Fed Hawks argue that the slowing job growth is structural, caused by an aging population and immigration policies, meaning there are simply fewer people available to work.
If the problem is structural, cutting interest rates will not fix it; it will only cause inflation. However, if the Doves are right and the weakness is cyclical, then cutting rates is the correct medicine. Understanding this distinction helps you see why the Fed is so hesitant to move.
The Fun Corner
The Santa Claus Rally
Since we have just flipped the calendar to December, it is the perfect time to talk about a market anomaly known as the “Santa Claus Rally.” This isn’t just about holiday shopping boosting retail stocks. It refers to a specific sustained increase in the stock market that historically occurs in the last week of December through the first two trading days of January.
Yale Hirsch, the creator of the Stock Trader’s Almanac, first documented this pattern in 1972. Theories on why this happens range from tax considerations and holiday bonuses to the general feeling of optimism on Wall Street (or perhaps the pessimism of the bears who have gone on vacation). While it is never a guarantee, history shows the S&P 500 has risen during this period about 75% of the time. However, there is an old saying among traders: “If Santa Claus should fail to call, bears may come to Broad and Wall.” Essentially, if the rally doesn’t show up, it is often seen as a bearish signal for the year ahead.
The Fed’s December Dilemma
The Federal Reserve is heading into its December meeting with a divided house. The central question keeping Chair Jerome Powell and his colleagues awake is whether to cut interest rates or hold them steady. This isn’t just a polite disagreement; it is a fundamental clash over what the economic data is actually telling us.
On one side, we have the Hawks. They are looking at the September employment report, which showed payrolls rising by 119,000. To them, the labor market looks balanced, and inflation remains a broad-based threat that is still hovering above target. Kansas City Fed President Jeffrey Schmid is leading this charge, arguing that the slowdown in hiring is structural—a result of demographics—rather than a sign of a crumbling economy. If they are right, cutting rates now would be a mistake that could de-anchor inflation expectations.
On the other side, we have the Doves, represented by voices like Governor Christopher Waller. They look past the headline numbers and see the cracks in the foundation. They point out that the past few months of data have been revised downward repeatedly. The three-month average for job growth is a meager 62,000, far below where we were at the start of the year. They argue this weakness is cyclical and driven by falling demand. For the Doves, the rising unemployment rate and falling job openings are red flags that restrictive policy is hurting the economy.
Complicating matters is the partial data blackout from October due to the government shutdown. Investors are flying blind regarding the unemployment rate for that month. While private sector data suggests softening demand and manufacturing contraction, it is not the full picture.
So, what is the verdict for your portfolio? The Hawks might win the battle in December, leading to a pause in cuts, but the Doves likely have the winning argument for 2026. The broader trend points toward a cooling economy. This environment suggests a defensive strategy: maintaining a neutral stance on stocks while overweighting government bonds. We need to see clear signs that inflation is dead and growth is stabilizing before taking on more risk. Until then, the labor market remains the only compass we have.
The Last Say
Navigating the Fog
We are closing out this newsletter with a reminder that certainty in investing is a luxury we rarely get. The split within the Federal Reserve highlights just how difficult it is to interpret the current economic landscape. When the people with the best data available cannot agree on the direction of travel, it is a signal for retail investors to proceed with caution.
The coming weeks will likely bring volatility as the market tries to price in the outcome of the December meeting. Remember that the “headline” numbers often mask the real trend. As we discussed, a strong job number that gets revised down a month later is not actually strong. The key takeaway for the immediate future is to watch the bond market and the language the Fed uses regarding the labor force. If the consensus shifts toward the Dove’s view of cyclical weakness, we could see a repricing of risk assets.
For now, patience is your best asset. Do not feel the need to chase rallies or panic sell on dips. The smart money is sitting in a defensive position, waiting for the fog to clear. Preserving capital is just as important as growing it, especially when the path forward is this obscure.
