Dow Resilience Tested: Early Strength Amid Mounting Downside Risks

Early December saw gains in major indices, including the Dow Jones Industrial Average, but these were tempered by persistent economic risks. The September 2025 U.S. CPI rose 3.0% annually, with core inflation also at 3.0%, driven by higher food (3.1%), energy services (6.4%), and shelter (3.6%) costs. This indicates sticky price pressures that could delay the Federal Reserve's easing path, maintaining restrictive monetary policy longer than anticipated.

Meanwhile, the CBOE Volatility Index (VIX) settled in a range of 16.87 to 17.24 in early December, down from peaks near 25.97 in November but still elevated. This partial recovery suggests reduced immediate anxiety but lingering volatility, reflecting ongoing uncertainty in market conditions. Investors should maintain caution, as volatility increases often warrant a wait-and-see approach for risk assets.

The 10-year Treasury yield framework remains structurally elevated, with rates interpolated via a monotone convex spline methodology that floors yields at zero. This constrains borrowing costs and indirectly shapes Fed policy considerations, limiting risk appetite in markets. The absence of specific yield levels means investors must rely on this framework's design, which prioritizes stability but may suppress equity valuations, particularly for growth-sensitive securities.

With the next CPI release scheduled for December 18, 2025, the market awaits clarity on inflation trends. Persistent risks-such as regulatory uncertainty around Fed policy and high yields-underscore the importance of cash flow discipline and downside protection in portfolios.

Critical December Catalysts & Thresholds

December brings three decisive economic signals that will shape near-term market direction and risk assessments. Investors must track these events closely as they offer clarity but also amplify underlying vulnerabilities.

The November CPI release on December 18 serves as the first major inflation gauge for the year's final quarter. September's data showed persistent price pressures, with headline CPI rising 3.0% annually and core inflation matching that level, driven by shelter and services costs. If November inflation decelerates below 2.5%, it could strengthen Fed dovish expectations. Yet, shelter costs remain sticky, creating room for disappointment that might delay rate cuts. This report directly tests whether earlier easing in energy and food costs has translated into broader relief.

Concurrently, the December 9-10 FOMC meeting will deliver the Federal Reserve's Summary of Economic Projections and policy stance according to the official calendar. Minutes from past meetings show that officials prioritize labor market strength and core inflation momentum. With real yields near decade highs, any hint of prolonged restrictive policy could pressure risk assets. The meeting's outcome hinges on incoming data, including the LEI and CPI, creating a feedback loop where weak economic signals might prompt more hawkish guidance.

The LEI update on December 9 adds urgency to the Fed's calculus. August's 0.5% drop and 2.8% six-month decline signaled recession risk, with manufacturing orders and tariff impacts dragging growth. If the December update shows no recovery, it would confirm deteriorating conditions and pressure the Fed to delay rate cuts. However, LEI revisions or volatile components like consumer expectations could mask underlying weakness, demanding cautious interpretation.

These catalysts intersect: weak inflation data and a deteriorating LEI could force the Fed to balance growth concerns against stubborn price pressures. Cash buffers remain prudent until these signals resolve ambiguity around policy timing and recession probability.

Economic Guardrails: Measuring Recession Risk

The recent LEI decline confirmed cooling momentum, acting as a market canary. That 0.5% August drop wasn't isolated; its six-month annualized slide now stands at 2.8%, pushing the diffusion index below 50 – a technical recession warning under our 3Ds framework. Weak manufacturing orders and jumpy tariff impacts clearly dragged, with the next LEI update on December 9 offering crucial near-term clarity. This slowdown intrinsically raises recession odds, especially when layered atop persistent inflation signals. Core CPI stayed stubbornly at 3.0% annually in September, fueled by shelter, medical care, and used vehicle costs – trends not exactly compatible with a soft landing. Higher tariffs now compound this risk by squeezing manufacturing margins and consumer budgets simultaneously, creating a vicious feedback loop.

Current market positioning feels dangerously complacent relative to these downside signals. While investors remain relatively bullish on discretionary names like travel stocks, the underlying economic fabric is fraying. The LEI's weakness in manufacturing components and the stubborn core CPI readings suggest inflation isn't fading easily, forcing the Fed into a corner where aggressive rate cuts are off the table. This combination – slowing growth with sticky inflation – historically leads to grinding market declines rather than sharp recoveries. Market complacency here is the first red flag.

Our guardrails demand action if these signals strengthen. A further LEI decline below the 50 threshold or a core CPI reading above 3.2% in the next release would confirm worsening recession and inflation risks. Simultaneously, any escalation in manufacturing tariffs would amplify supply chain frictions and consumer price pressures. If these downside triggers align, reducing exposure becomes imperative. The priority shifts decisively to preserving capital and enhancing liquidity buffers, aligning with the "Cash is King" stance, especially when core inflation persists near 3.0% and leading indicators deepen negative territory. Current positioning offers little buffer against this confluence of risks.

Cash Flow & Positioning Strategy

Our current posture remains defensive, focused on capital preservation amid persistent inflation and weakening economic signals. The September CPI's 3.0% annual reading confirms pricing power remains entrenched, undermining the Fed's price stability mandate. This necessitates a wait-and-see approach until the November CPI print on December 18th provides clearer evidence of inflation cooling. Until then, we defer all new rate-sensitive commitments to avoid locking in suboptimal yields in a still-tightening environment.

The August LEI's 0.5% drop, coupled with its six-month annualized decline and contraction in the diffusion index, validates recession warning signals under our 3Ds framework. Weak manufacturing orders and tariff impacts continue to strain the outlook. We will reduce exposure to interest-rate sensitive assets if the December 9th LEI update fails to show stabilization. The next LEI release acts as our primary trigger for reassessing equity or credit positioning.

The 10-year Treasury yield framework remains structurally elevated, with rates interpolated via a monotone convex spline methodology that floors yields at zero.

. This constrains borrowing costs and indirectly shapes Fed policy considerations, limiting risk appetite in markets. The absence of specific yield levels means investors must rely on this framework's design, which prioritizes stability but may suppress equity valuations, particularly for growth-sensitive securities.

The December 9th-10th FOMC meeting according to the official calendar offers the next critical policy signal. While market pricing currently reflects a hold, any shift toward Hawkishness in the Summary of Economic Projections regarding rate timing or balance sheet runoff could trigger immediate volatility. We stand ready to adjust duration and liquidity based on the Committee's tone and forward guidance. For now, maintaining flexibility and defensive positioning aligns with the highest priority: downside protection.