Weekly Market Update: A brief reprieve

The market reaction to the news has been largely positive. Share prices of US oil majors have risen. Venezuelan government bonds have jumped sharply. Oil spot and futures prices have been volatile, with near-term supply disruption and geopolitical risks battling expectations for increased oil supply that could eventually follow from US investment in the sector (see Exhibit 1).  While Venezuela has the world’s largest oil reserves, its production is relatively limited. Twenty years ago, production peaked at three million barrels per day; today it is under one million. A return to the previous level, which would in any case not be swift, amounts to just a 2% increase in total global production. 

Economic data

Perhaps more relevant for investors has been the slew of US economic data released – notably GDP, inflation and non-farm payrolls – catching up from the government shutdown-induced pause.

In contrast to predictions of stagflation following the Liberation Day tariff announcements, US growth has accelerated, while inflation has fallen after an initial jump. US GDP rose by 4.3% in the third quarter (Q3) in real terms (seasonally adjusted annual rate). The primary contributor to growth was consumer demand, again contradicting predictions of a collapse due to tariffs. October’s retail sales data and anecdotal evidence from the holiday shopping season suggest consumers are still spending.

The second largest contributor to growth was net exports – to be expected given the significant increase in US tariffs. In fact, imports declined by just 2% from the same quarter in 2024, while exports rose 4%, boosted by a weaker dollar.

If there was any disappointment in the figures it was the contribution to growth from business investment: just 0.4% compared to an average of 1.1% in the first two quarters of the year. This is worrying as predictions for US growth are premised on continued business investment related to artificial intelligence (AI).

A look at the detail shows that AI-investment remains robust, however. The low headline figure was due to disinvestment in the manufacturing sector (see Exhibit 2). This figure aligns with the ISM manufacturing index data for the same period, which was below 50 (indicating contraction). The ISM average for Q4 is marginally worse. While this is not the outcome the Trump administration hoped to see, any boost to domestic production from tariffs is likely to take time to materialise; an auto factory is not built overnight.

While GDP growth was above expectations, inflation was below. The increase that followed the imposition of tariffs was never as great as feared (headline inflation peaked at 3%) and it has fallen over the last two months. Core goods inflation in particular was subdued. Any rejoicing should be tempered, however, as the data is distorted by the US government shutdown. Future months are likely to show inflation running at a faster pace.

The final major economic release of the year covered the US labour market in November (December’s data will come out on 9 January). The figures showed an unhealthy dependence on hiring in the healthcare sector, which has been the case for two years. Private non-farm payrolls rose by 69,000, of which 64,000 was in the healthcare and social assistance sector, which accounts for just 16% of employment.

The outlook is clouded by two contradictory forces: AI and immigration policy. AI is expected to suppress hiring, if not lead to actual job losses, while deportations should force employers to replace lost workers with legal ones. How this plays out over the course of the year will be a key factor affecting the Federal Reserve’s decisions on its primary policy rate.

Santa Claus rally

Santa Claus did not bestow a year-end rally on investors: most major indices ended the year below their October-November peak. One should not be too cross, however, as the returns for the year – let alone those from the post-Liberation Day lows – were very pleasingly in double digits.

The 2026 outlook is less bright for some who observe that four consecutive years of gains for equities is rare. While true, this is more a statistical fact that an economic one. Equity market performance will depend primarily on growth and, for now at least, we see the prospects as positive. Returns are nonetheless likely to be lower than last year, and it would be a welcome sign to see the gap between tech and non-tech indices narrow. In a sense this is a requirement if the AI boom is to continue. Tech companies are investing massively in AI. They must ultimately recoup that investment by selling their products to non-tech companies, who will use them to increase revenues or reduce costs. If this does not transpire, predictions of an AI collapse may prove to be prescient.