Top of the Morning: CIO Strategy Snapshot - Word of the year 2025

Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. The end of the year is nearly here with almost all major economic and policy events out of the way.

As investors prepare to shut down for the holidays and plan for the year ahead, there are a few final economic data points and Fed news to digest for those plans. So joining us today for our final CIO Strategy Snapshot Conversation of 2025 and to discuss his Word of the Year blog, glad to welcome back Jason Draho, the Head of Asset Allocation for the Americas with the UBS Chief Investment Office. Jason, here we are, late December of 2025.

Thank you very much for dropping by on this Wednesday morning to spend some time with our listeners and clients as we close out the series for the year. It's good to be here. It's hard to believe it's already the end of the year, but another calendar year in the books.

And Jason, before we turn off our microphones for 2025, a lot to cover here this morning with our listeners. So let's begin with the economy. We did receive the November jobs data and some from October as well, plus other data in the past few days.

So we've been digesting a lot of data points. What does it say about the state of the economy, the data we've been receiving lately? So the most important stuff is the payroll data or the jobs data.

So we got a complete report for November, which included the payrolls growth, which has come from the establishment survey, as well as update on the unemployment rate that's going to be based off of the household survey. There was also data for October for payrolls, but not the unemployment rate because the household survey wasn't conducted because the government shut down. So the takeaway is I think kind of consistent with what we've seen kind of recently, relatively soft labor market.

The data does not indicate necessarily further softening, maybe even some slight signs of stabilization and improvement. The October data, at least at the headline numbers, paint a fairly negative picture in part because there were significant government worker layoffs. These are delayed layoffs for those who accepted kind of buyout packages earlier in the year.

It wasn't until October that they showed up. So that caused sort of a big surge in terms of the kind of government employee drag was about 162,000, whereas the total for the month was 105,000. So if you actually think of like the net change for the private sector, it was actually positive.

For November, the jobs number, it came in better, it was at 64,000, which is kind of a little bit better than the consensus, you know, 50,000. If you strip up the noise of both the government shutdown, if you obscure some of the data, but also those delayed layoffs, the three-month kind of moving average of private sector payroll growth is now up to about around 75,000. For context, most economists would now think that the trend rate of job growth based on just sort of normal demographic immigration factors should be in the range of maybe 60,000 to 80,000, give or take a little bit.

So it's actually a 75,000 three-month moving average for the private sector is sort of consistent with that view. So that's the positive. The unemployment rate did tick up.

It's now up to 4.6% versus the last reading we have for September. We don't have October, which is 4.4%. And wage growth slowed, so there's definitely some signs of slackening in the labor markets.

The participation rate has increased, so there's more people coming back. So the story is, yes, there's decent job growth, and that is a positive. But the fact that unemployment is rising also suggests that there's still a fair amount of increasing slack and sort of a gap between the supply and demand of labor.

So the net result is, I think for those concerned about the labor market kind of falling off a cliff or sort of really decelerating, based on the data we got earlier in the summer, I think those fears have been alleviated quite a bit. You can sort of see some signs of perhaps things are starting to inflect a little bit more positively. But it's far too soon to kind of draw definitive conclusions.

If we then think about some of the other data, like retail sales we got for October, the key thing there is that the headline number was kind of suggested some mild contraction of the control group. That's the more volatile components, whether it's food, energy, even auto sales, that actually grew 80 basis points month after month. There is some quirks in terms of how the data is calculated, from the month-over-month effect from September to October.

But overall, the picture suggests that the consumer continues to hold up well. It was relatively elevated during the summer, so we're seeing a bit of a step down, at least to the October data. The higher frequency data that we can see for credit card spending, but also especially around the retail sales or holiday sales, reports for the major retailers suggest that spending is tracking along with their current forecast going into the holidays, which is about 4% growth.

It's not a boom year, but solid by any measure. If you add those two things together, consumers in aggregate continue to spend a labor market that definitely shows signs of stabilization. I'd add a more modest case of job growth.

That reinforces the view that, ultimately, recession risk remains quite low. Given what we see for the pipeline early next year in terms of incremental fiscal stimulus, larger tax refunds, that the economy looks in relatively decent shape and then poised to accelerate into next year. That's the picture we're getting.

Other parts of the economy, like manufacturing, production, that's been relatively tepid. There's no real acceleration there. It's still an economy that's being led by the consumer holding up relatively well.

If that were to change, if that were to... If the consumer at the higher end in particular were to crack, then there's certainly more vulnerabilities. But overall, the picture still looks relatively constructive and reinforces our view that next year's growth will be around the 2% trend rate.

And as we move into the early to the first half of the year, growth is likely to accelerate because of the policy stimulus. So, Jason, with that assessment of the U.S. economy, and there was a lot there, thank you for that breakdown. Let's turn focus to the Fed for a few moments.

Since you and I last spoke, we did see that the Fed cut interest rates another 25 basis points. A CIO had expected this heading into the meeting last week. However, the real focus was on the guidance for future cuts.

So with that, what was CIO's takeaway from the meeting last week? And did it change as a result of the data? Before going into the meeting, we had mapped out different data points or parts of the communication, whether it's commentary from Fed Chair Jay Powell, the statement from the Summary of Economic Projections, and some of the details therein.

Is there a sign that would suggest that we tilt the scales one way or another in terms of where the Fed is going? Into the meeting, or the expectations going into the meeting was that this would be a hawkish cut. So the Fed would cut 25 basis points, but they would be hawkish, sort of signaling that we're perhaps done for the time being, and maybe longer.

Relative to those expectations, the view was that the Fed was a little bit dovish. I think that gets into semantics or subjective interpretations of whether you think they are or not. When we looked at various criteria, including did they insert statements into the awards or clauses in the statement suggesting that they were heightened concerns, or the risks are tilted more in one direction, or do they want to take a measured approach to cutting rates?

We didn't see enough indicators that we had pre-specified to suggest that this is a dovish Fed, and therefore they would be continuing a path towards cutting rates aggressively. Our base case view was they would have cut last week, and then they cut once more in the first quarter. More likely in March, they would take a bit of a pause, and nothing that came out of the meeting suggested otherwise.

And probably the big real, maybe smoking gun piece of evidence in support of that is during Powell's press conference, both in his prepared remarks, but also then early on he was asked a question about policy, how they feel about policy. He literally read a statement saying, we think we're in the range or the top end of the range of neutral, and therefore assessing the data. That to me is a signal that if you think you're around a neutral, then the need to cut becomes diminished.

So it's a bit of a signal suggesting we will be pausing at least in January, barring the data being significant one way or another. Given the labor market data we saw yesterday, certainly not enough to warrant the Fed to move aggressively, given the overall job growth. The unemployment rate is taking a higher, some of the slackness does suggest the Fed has more work to do.

So I think it's reasonable to look at a cut in the March time frame. Beyond that, then, market pricing doesn't have even a full cut until June. There's a lot of speculation on who will be the nominee for the next Fed chair, what will their approach be.

So I think until there's sort of clarity, and that probably won't happen until some point in January, who the nominee would be, what their views on policy are, it's quite likely that we get one in Q1 and then nothing else for a while. And then it becomes much more sort of data dependent. If the economy is not flowing, if inflation is still well above 2%, and all that kind of coming down gradually, it's very plausible the Fed may not do anything.

But that's kind of our view. The outcome of last week and the data we've had since then has not changed our view that the Fed will do one more cut in Q1, and then it will probably be more of a wait-and-see mode. It's probably not too much until the next Fed chair is in place.

And at that point, it's really contingent on what the data would allow them to do. OK, so that covers the Fed and CIO's outlook for monetary policy as we head into 2026. So, all right, let's end today, Jason, with your fifth annual Word of the Year blog.

I'd cue in a drumroll if I could. So, what, Jason, was your selection for the 2025 wordie? So, first, I'd like to kind of recap what my prediction was a year ago at this time.

And it was roaring, as in sort of roaring in the 20s. Keep in mind, at that point, we had two consecutive years of the economy growing, you know, almost 2.7, 2.8%. The stock market in both years had been up, you know, around 25%.

And there was a lot of investment. There was kind of good momentum. And, of course, we've talked in the past about the roaring 20s sort of regime that I think is very much kind of plausible.

And, you know, at the start of this year, it looked like very much on track to continue subject to policy choices, subject to developments in AI. So, that was my kind of rationale. I think it's very cool that I can sort of dispensate the roaring.

It did not end up being my kind of choice looking back on 2025 as the wordie. The word has really been used infrequently this year. There's also been other concerns about just the state of the economy, about other policy developments.

And I'd say it's used less this year than it was the past few years. So, that was kind of ruled out. One thing that I did sort of, you know, anticipate is that the first half of this year would be dominated by kind of, you know, Trump 2.0 kind of related policies as they come in and different measures, whether it's extending tax cuts, tariffs, things of that sort.

Once that sort of played out, then the focus could turn to other factors. And if the economy was doing well, we could kind of come from behind, which I think given where we are with the S&P up 17% approximately, the Iran economy kind of, you know, still going decently solid with good momentum going next year. The regime does feel like it's sort of back on the table as a possibility, but certainly not a serious candidate for the awardee this year.

So, if that wasn't the case, you know, what else, you know, would I pick? I think if I were to define this year, just trying to summarize the financial market performance this year, it comes down to two words more than any other sort of driving performance. One is AI, which I guess is not necessarily a word, but I like to treat it as a word, and tariffs.

You know, for AI, it's clear that AI, the cap spending keeps getting higher, you know, further developments in models and application and adoption, you know, financing now, like how this AI investment is going to be financed. They've all had, you know, influence and sort of drive in the markets. Early in the year, the deep-seas news of, you know, kind of changes to perceptions of potentially the cost of and efficacy of developing these models and, you know, the returns on investment.

We've seen, obviously, in the past few months, the stories of increased debt financing or reliance on debt financing, this sort of circularity among different major players. That's sort of been a concern. So, for good or bad, it's been a central story.

Ultimately, to make, you know, the main argument against AI is that this is really the third consecutive year that it's been a dominant market theme. There's really nothing to me sort of distinct about AI's importance this year versus the past two, and that I think of the sort of the word of the year should really kind of capture something specific to this year, not as a, you know, you've been up three times, therefore you get it sort of situation. So, it wasn't AI, and so my choice for this year was tariffs.

It's, you know, everyone expected tariffs to go higher with the new administration. I think what's been surprising is the manner in which they did, and also the kind of partial rollback. And if you look at the pattern of, you know, the tariff story this year, it does correlate fairly well with the dynamics across financial markets, probably better than any other factor.

You know, we anticipated tariffs to go higher as an effective tariff rate from around 2% at the start of the year, about 10%. It did have to cause some mild economic pain, but nothing, you know, too serious. You know, the markets definitely were not pricing, you know, an effective tariff rate of nearly 30%, which is what it would have materialized if all the tariffs, like the reciprocal tariffs announced on April 2nd, if they'd been actually adopted.

And so that led to them trying to price that possibility, led to this 20% correction on the S&P 500. But that sell-off reversed, you know, very quickly once those tariffs were delayed. And as we went through the spring and into the early summer, as various deals were struck between the U.S. and other countries, that would bring those tariff rates down.

So, the effective tariff rate got down to about 17%. You saw equities and risk assets kind of rally with it. So, to me, the time series profile, the market performance this year, correlates very well with kind of the development tariffs and the sort of effective tariff rate.

If that's the case, I think it's hard to sort of, you know, point to another word that is sort of more influential for overall market performance this year. So, tariffs is my wordy pick for 2025. Okay.

So, Jason, that was looking back on 2025, the word you selected, tariffs. What is your prediction for the 2026 wordy and why? So, I just want to remind our listeners that when I think of this as a prediction for the wordy, it's not meant to be a prediction of exactly what will happen with the economy or the markets.

It's a prediction for, like, what sort of word will best capture a key dynamic that is, you know, kind of going on. So, it's, you know, that's, you know, subtle, but I'm planning an important distinction. So, it could be something related to, you know, Trump 2.0 policies again, but, like, tariffs are already kind of in use this year.

Tax cuts have been already passed. So, it's not only obvious what from, you know, from a policy perspective what the word would be. I think affordability is definitely front of mind or top of mind for the general public.

It's really a political issue right now that could spill over into financial markets, but it really has to spill over to some indirect means of influencing policy choices. So, a possibility, but I think that's kind of a low possibility. A term right now that's very prevalent in financial markets, which kind of rules it out because it's an expression and not a single word, is run it hot.

The idea that policymakers, you know, with the Trump administration, will try and stimulate growth going into the midterm elections, do what they can. You know, the Fed might also have policy run a little bit looser. All that would suggest, you know, you kind of run it hot.

Now, that's definitely a possibility, but, you know, this time last year there was a consensus view that we'd get sort of sort of inflation scenario that not materialized. And so, I think kind of run it hot, if you even treat that as a word, that might be a little optimistic. That will play out.

If it does, you know, bubble, you know, is, you know, will be another kind of candidate for word of the year. But I tend to view kind of bubble as more of a description of what's going on as a driver of the, you know, kind of equity markets. It's also not clear to me that, you know, at all that the equities are in a bubble or kind of really at risk of a significant bubble.

So, I don't kind of rule that out as just a word. This leads ultimately to my prediction for 2026 is that productivity will be the, you know, word of the year. It is admittedly a bit wonky, and it's maybe a choice that only economists would really appreciate.

But in my view, productivity growth, whether it's high or low or not, is maybe the most important economic factor driving the market's policy and bubble risk next year. And the real reason why is that to me it's kind of like this secret sauce that can connect between, you know, AI, debt policy, growth, inflation, you know, all of which will drive market performance, you know, next year. You know, for AI, you know, everyone expects AI to have these productivity improvements.

But we actually need to start to see it have an impact on companies, you know, kind of bottom line, their operating performance. An enormous amount of money has been spent on AI CapEx, and the concerns about that sort of return on capital, that return on investment, you know, continue to simmer. You know, it's growing now that there's this sort of reliance more on debt financing.

So any time that we're going to see AI adoption accelerating applications producing material economic benefits, ultimately through productivity gains, that's what kind of becomes critical for, I think, this AI thesis and concerns about AI investment actually, you know, alleviated to some extent. So it's really the key that we, I think it's critical to start to see those productivity gains. If you get productivity gains at an individual company level, you should aggregate up in the economy to have the economy overall more productive, which is usually unambiguously positive for the economy.

So, you know, it should be a good thing. You can grow faster without being inflationary. But, you know, and it's maybe productivity is also explaining right now some of the disconnect we've seen this year between resilient growth and a labor market that's been relatively soft, especially the second half of this year.

So, again, that kind of plays a critical role. Productivity, I think, is also a central part of, you know, Fed policy for next year. I do have to take my word for it.

Last week at the FOMC press conference, Fed Chair Jay Powell said as much. You know, the Fed updated their economic projections for next year where they took up their growth forecast, 50 basis points. At the same time, the unemployment rate was forecast to be unchanged and inflation went down.

That change is pretty optimistic. You can see you're going to get faster growth and a little less inflation than you anticipated three months ago. It's relatively optimistic.

He's asked about it. Powell highlighted the fact that strong productivity, partly from AI, is a key factor in this forecast. The implicit part of this is that, you know, or what's left unfed by Powell is that the FOMC really is kind of banking on productivity gains to help kind of thread the needle between the cutting rates to support the labor market, also not causing inflation to go higher.

So, again, productivity is key for the Fed. And it, in some way, could even create a dilemma for the Fed if AI-related productivity gains really start to ramp up or companies don't want to hire because they're trying to anticipate productivity gains from AI. You could have a situation where the labor market remains tepid.

The Fed's dual mandate would suggest they have them keep cutting rates to support the labor market, even though it's not necessarily helping create demand for labor because of the AI structural story. Yet those rate cuts could actually help fuel, you know, kind of speculation in other parts of the market. So, in multiple ways, AI or productivity is key to what's kind of perceptions about AI, you know, whether it's a bubble or not.

It's key to Fed policy, what direction they might take. So, it's a word that I think is already kind of somewhat in front of the mind of investors anticipating these gains. And now I think J.

Powell certainly, to me, kind of gave it a bit of a boost to come up strong on the Gates in 2026 to validate the productivity as a key driver. So, it is, to me, ultimately sort of the key economic variable, the key word to watch for next year that could drive a lot of things. And if it's high, then it's a positive.

If it isn't, that also matters because then that complicates the life for investors in thinking about AI and for Fed policy. So, that's my choice, is productivity, that's the rationale for it. Okay.

So, productivity is the prediction for 2026, as we're speaking here in December of 2025. And your selection for the 2025 wordie, again, Jason, was tariffs. A very thought-provoking as we wrap up our series here for 2025.

Thank you very much, Jason, for all of your contributions throughout the year. Really enjoyed these weekly conversations and do, of course, look forward to picking back up with the CIO Strategy Snapshot with you in January of 2026. Though, in the meantime, Jason, do enjoy the holidays and hopefully some well-deserved downtime.

Well, thank you, Dan, to you as well. Hopefully, you have a wonderful break. And to our listeners, thank you for listening to us on a regular basis throughout the year.

Enjoy the holidays and we will be communicating with you again early next year. Absolutely. And, yes, to your point, Jason, a big thank you to you, our listeners, our clients, for tuning in throughout the year.

And with that, once again, I do want to point out Jason's blog, which we have been referencing today. The fifth iteration of the Word of the Year is available for you now up on UBS.com forward slash CIO. For clients of UBS, please reach out to your UBS financial advisor if you would like to receive Jason's 2025 Word of the Year blog directly.

From UBS Studios, I'm Dan Cassidy. Thank you for joining us. Thank you for tuning in.

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