The Fed's December Dilemma: Why Powell Just Threw Cold Water on Rate-Cut Hopes

The market giveth, and the Fed taketh away.

After a bruising November that sent the S&P 500 down nearly 2% and pushed Bitcoin into its worst monthly performance since 2022, U.S. equities staged a spirited comeback heading into Thanksgiving. The S&P 500 surged 1.55% Monday to close at 6,705, while the Nasdaq Composite jumped 2.69%—its best single day since May. By Wednesday's close, the S&P 500 traded up 0.69% to 6,812, with all three major indices on track for their strongest week since late June.

The rally was driven by renewed optimism around artificial intelligence—particularly after Google unveiled its Gemini 3 model—and growing conviction that the Federal Reserve would deliver a third rate cut at its December meeting. But just as traders were settling in for turkey and a potential Santa rally, Fed Chair Jerome Powell delivered a sobering reminder: nothing is guaranteed.

The Fed's Murky December Decision

Powell's recent comments have dramatically shifted market expectations:

• The odds have collapsed: The CME FedWatch tool showed December cut probability declining from 90.5% to 54.7%, with recent readings as low as 32%

• Powell pushed back: At the October meeting, Powell stated a December cut is "not a foregone conclusion"

• The Fed is divided: The vote was 10-2, with dissent from both Fed Governor Stephen Miran (who wanted a larger 50bp cut) and Kansas City Fed President Jeffrey Schmid (who opposed any cut)

The uncertainty stems from a persistent inflation problem. The Consumer Price Index increased 0.3% in September, with the all-items index up 3.0% over the prior 12 months—still well above the Fed's 2% target. Gasoline rose 4.1% and was the largest factor in the monthly increase, raising questions about whether energy-driven price pressures will continue.

Inflation: The Ghost That Won't Leave

The stickiness of inflation explains much of the Fed's hesitation:

Current inflation landscape:

• Headline CPI at 3.0% year-over-year (September)

• Core inflation also at 3.0%—both well above the Fed's 2% target

• Atlanta Fed President Raphael Bostic warned that business surveys show "continued upward pressure on costs and prices," with little relief expected before mid-to-late 2026

What's driving prices higher:

• Energy costs remain volatile and elevated

• Wage growth continues exceeding pre-pandemic norms

• Tariff-related price increases filtering through supply chains

• Service sector inflation proving particularly sticky

The Fed's dual mandate—maximum employment and price stability—is pulling policymakers in opposite directions. Labor market softness argues for cuts, while inflation argues for patience.

AI's Moment: Alphabet Reignites the Trade

While macro uncertainty swirled, one sector continued to capture investor imagination: artificial intelligence.

The AI rally accelerated:

• Alphabet shares gained 6.3% after Google announced its upgraded Gemini 3 model

• Nvidia posted $57 billion in Q3 revenue, up 62% year-over-year, beating Wall Street's $54.9 billion estimate

• Nvidia's Q4 guidance came in at $65 billion, ahead of expectations

• Dell rose 2.9% on strong AI-driven guidance, forecasting $31.5 billion in Q4 sales vs. consensus of $27.59 billion

The spending continues:

• Hyperscale infrastructure investments are accelerating, not decelerating

• CEO Jensen Huang declared "Blackwell sales are off the charts, and cloud GPUs are sold out"

• Big Tech showing no signs of pulling back on AI capex

But risks remain:

• Valuation concerns persist for stocks up 50-100% year-to-date

• Questions mount about return on investment timing

• Recent volatility reflects tension between believers and skeptics

For systematic investors, this creates both opportunity and hazard: momentum strategies can capture continued upside, but mean-reversion models may anticipate pullbacks in overheated segments.

Bitcoin's Brutal November

While equities found their footing, cryptocurrencies endured a punishing month:

The damage:

• Bitcoin plummeted more than 26% from its record high above $126,000 in October

• Price fell to the low-$80,000s before recovering to $90,000-$91,000 during Thanksgiving week

• Marked Bitcoin's worst monthly performance since the Terra and FTX collapses in 2022

• An estimated $3.5 billion in net outflows from Bitcoin ETFs occurred in November

What drove the sell-off:

• Broader risk-off sentiment as investors reassessed valuations

• Bitcoin's correlation with tech stocks meant it followed AI names lower

• Long-term holders taking profits after the 2024-2025 rally

• Regulatory uncertainty despite pro-crypto political appointments

Looking ahead: The recovery remains fragile, but some analysts point to historical seasonal patterns that could support a "Santa rally" heading into year-end. However, for investors who view Bitcoin as "digital gold," November was a reminder that the asset remains highly volatile and lacks gold's established safe-haven credentials during market stress.

Strategy in Focus: Daly Asset Management Core Return Focused

In an environment of Fed uncertainty, sticky inflation, and stretched AI valuations, value investing offers a compelling counterweight.

This week, we're highlighting a newly available strategy on Surmount: Daly Asset Management Core Return Focused, one of several strategies recently released by Daly Asset Management.

The approach: Hand-selected U.S. listed preferred and common stocks trading at significant discounts to predicted future value. It's concentrated, high-conviction value investing focused on quality over quantity.

The track record:

• 134.14% total return since inception

• 18.61% annualized return

• 11.39% return over the past year

• Low risk with just 1.17% standard deviation

• 0.79 Calmar ratio shows strong risk-adjusted performance

Why it works now:

After years of growth stock dominance, this strategy offers several advantages:

• Mean reversion: Value stocks at discounts to intrinsic value offer asymmetric upside as markets normalize

• Defensive positioning: Strong fundamentals and current earnings provide downside protection during volatility

• Rate resilience: If Powell maintains higher-for-longer rates, value stocks with tangible cash flows become more attractive than growth stocks priced on distant profits

• Disciplined execution: Averaging just 0.12 trades per day, the strategy takes a patient, research-driven approach

The 2.34 return factor (meaning $2.34 generated for every $1 invested) demonstrates the power of disciplined value investing through multiple market cycles—without the volatility typically associated with high returns.

For investors concerned about elevated tech valuations or Fed policy uncertainty, this value-focused approach offers a different lens: ignore the noise, focus on fundamentals, and let price converge to value.

Explore all of Daly Asset Management's strategies on the Surmount platform.

Past performance does not guarantee future results. All investments involve risk.

Closing Thoughts

As we head into December, markets face a critical juncture:

The challenges:

• The Fed's next move remains genuinely uncertain

• Inflation refuses to cooperate with the 2% target

• Valuations across both equities and crypto have been tested

• Geopolitical risks and policy uncertainty persist

The opportunities:

• Corporate earnings—particularly in AI-driven sectors—continue surprising positively

• Seasonal factors historically favor year-end strength

• Systematic strategies can capture upside while managing downside risk

For systematic investors, this environment demands both conviction and flexibility:

• Conviction in long-term secular trends: AI, cloud computing, digital transformation

• Flexibility to adjust positioning when volatility spikes, Fed rhetoric shifts, or risk assets become overbought

The beauty of systematic investing is that it removes emotion from these calculations. Whether you're running momentum models, mean-reversion strategies, or volatility-adjusted portfolios, the key is consistency—letting your rules guide you through both exuberance and fear.

December will tell us much about 2026:

• Will the Fed deliver one more cut, or has the easing cycle ended?

• Will AI infrastructure spending continue accelerating, or have we reached peak capex?

• Will Bitcoin stage a "Santa rally," or will risk-off sentiment persist?

We don't have those answers yet. But we do know this: disciplined, rules-based investing has always been the surest path through uncertainty. As markets whipsaw between hope and fear, staying systematic isn't just prudent—it's essential.

The information contained in this newsletter is for informational purposes only and should not be construed as investment advice. All investments carry risk, including the potential loss of principal. Past performance does not guarantee future results. Before making any investment decisions, consult with a qualified financial advisor to ensure any strategy aligns with your individual financial situation, goals, and risk tolerance

.