US stocks opened lower on Thursday evening, Beijing time, as escalating geopolitical tensions threatened to test the market's resilience. Defense stocks broadly rose after a call to increase the defense budget to $1.5 trillion. Data showed a significant rise in US third-quarter productivity, which substantially lowered labor costs, while layoff levels remained low.
The Dow Jones fell by 173.47 points, or 0.35%, to 48,822.61; the Nasdaq dropped 54.96 points, or 0.23%, to 23,529.31; and the S&P 500 declined 4.75 points, or 0.07%, to 6,916.18. US stocks closed lower on Wednesday, with the S&P 500 and Dow Jones retreating from their record highs. The decline was triggered by a drop in crude oil prices, following remarks that Venezuela's interim government would transfer up to 50 million barrels of oil to the US, sparking concerns over increased supply. On Thursday, oil prices rebounded, with US crude rising over 1%. Defense stocks advanced on Thursday following the call for a $1.5 trillion defense budget by 2027. Shares of Northrop Grumman, Lockheed Martin, RTX, and Kratos Defense & Security Solutions were among the gainers. Analysts noted that markets had largely ignored global geopolitical risks until 2026, but with the new year underway, rising tensions could challenge the stock market's durability. Anne Walsh, Chief Investment Officer at Guggenheim Partners, stated, "Geopolitical news often moves markets in a very short period... but they are typically priced in quickly, after which the market refocuses on factors that more sustainably drive price movements, such as profits, margins, valuations, and other metrics. Ultimately, a 'buy-the-dip' mentality tends to re-emerge, and these very limited opportunities can be used to adjust portfolios." Walsh added, "If you will, staying diversified and being prepared is perhaps the best 'insurance' for protecting a portfolio while also positioning to seize opportunities." She remarked that the fundamental backdrop for equities remains "quite good," with valuations normalizing and the Federal Reserve expected to cut interest rates this year. Economic data released on Thursday indicated a substantial increase in US third-quarter productivity, which significantly reduced labor costs, while the level of layoffs held at low levels. According to the Bureau of Labor Statistics, nonfarm productivity—a measure of real output per hour worked—surged by 4.9% between July and September, matching expectations. However, unit labor costs, which gauge the relationship between productivity and compensation, plummeted by 1.9%, far exceeding the 0.4% decline anticipated in a Dow Jones survey. In a separate report, the Labor Department stated that seasonally adjusted initial jobless claims for the week ending January 3 were 208,000, an increase of 8,000 from the previous week but slightly below the expected 210,000. Continuing jobless claims, which lag by one week, increased by 56,000 to 1.91 million. Regarding Federal Reserve interest rate policy, the US Treasury Secretary emphasized that the Fed can no longer delay cutting rates. The Secretary reinforced the administration's stance on wanting lower rates on Thursday, stating that rate cuts are crucial for future economic growth. He expressed support for the President's economic agenda and noted that accommodative monetary policy would pave the way for future economic expansion. The Secretary stated, "Rate cuts will have a tangible impact on the life of every person in Minnesota; it is the only missing element to drive stronger economic growth. That is why the Fed should not delay action any further." The Federal Reserve cut rates three times consecutively in the final four months of 2025, totaling a 75-basis-point reduction, bringing the benchmark rate to a range of 3.5% to 3.75%. However, the pace of rate cuts is expected to slow significantly this year: market pricing suggests only two cuts, while the latest projections from Fed officials point to just one cut. An element of uncertainty in this outlook is the appointment of a new Fed Chair this year, a process the Treasury Secretary is leading. The term of the current Chair, Powell, expires in May, and the Secretary has narrowed the candidate list to five individuals. The Director of the National Economic Council and former Fed Governor Kevin Warsh are currently seen as the top two contenders.
