The End of an Historic Year and the Making of an Historic 2026
Word on the Street
The major events on Wall Street this month.
· 2025 Market Minutes: Five heavy hitting events that shaped the markets in 2025.
· Federal Reserve: Inflation data beat expectations, reinforcing another Federal Reserve rate CUT, along with expectations of future cuts.
· Jobs: The labor market continues to weaken, with key indicators flashing warning signs.
· Big Tech: AI hype is beginning to slow, and a new favorite trade is emerging.
What Happened?
Happy New Year all! We have just concluded a historic year in global markets. 2025 was marked by volatility, record gains and losses, a shift in economic policy, and interesting signals that ready the field for a more dramatic 2026. Here are five big ticket items that happened this year, to refresh your memory.
1. Liberation Day: Tariff policy began rolling out by the Trump administration early in the year, with April 2 being dubbed “liberation day.” The first week of April was met with historic losses in the stock market, the S&P dropped 10% in two days and the Nasdaq fell over 11% in the same time period. Then, tariff deals started being announced, and a record reversal took place. Since that reversal, the market became accustomed to tariff news and we saw only minor volatility for the rest of the year.
2. One Big Beautiful Bill Act: The OBBBA marked some of the most significant fiscal legislation in decades. Primarily, it extended the 2017 tax cuts that were imposed during Trump’s first term.
3. Precious Metals: GLD -1.02%↓ and SLV -2.02%↓ had record years, up 64.5% and 144.6%, respectively. The rally in precious metals came largely because of fears over tariff-induced inflation. Both gold and silver shattered the gains of broader market indices.
4. Crypto: FBTC 1.22%↑ and FETH 2.03%↑ ended the year DOWN -6.3% and -10.9%, respectively. For the first time in history we saw the Bitcoin Act of 2025 that would make bitcoin a permanent fixture in future policy rather than just an alternative speculation trade.
5. Federal Reserve: For the first time since 2021, the year of Fed policy decisions marked more rate cuts rather than hikes. Since September 2024 the Fed has dropped interest rates by 175 basis points into the “neutral” area of 3.25-3.50%.
Now let’s get into December 2025.
The Federal Reserve held its FOMC meeting which culminated in one of the strongest signs we’ve seen in years that the Fed is changing its tune and shifting focus. The Fed has two mandates, to keep inflation at 2% and to keep unemployment low. In the last few years we’ve seen inflation spiral out of control with CPI prints at the highest levels since the 1970s. After it was obvious that inflation was no longer “transitory” like Fed Chair Jerome Powell once stated, they began an aggressive hiking cycle to discourage spending and cool inflation. Now here we are, with inflation slowly taking the backseat in our minds. On December 18 the CPI print came in at a cold 2.7%, significantly beating expectations of 3.1%. With the “experts” in total shock, the Fed’s decision to keep cutting rates were validated.
Inflation now seems to be the metric that is mostly under control. Despite inflation still being above the target rate of 2%, it has been relatively stagnant for the last 1.5 years. The reason people are still so concerned with affordability and the price of eggs is not because inflation remains at 2.7% but rather because the aggregate increase of goods since the end of 2020 has been 25%. Unfortunately the 25% number is skewed, the aggregate inflation rate for things you buy regularly is much higher. The price of eggs has risen 40%, car insurance is up 56%, beef is up 51%, and butter is up 62%, gas for your home is up 54%, but I digress. The point to take home is that inflation is mostly controlled, the labor market is not.During the press conference after the December FOMC meeting Chairman Jerome Powell said this:
“If there are no new tariff announcements, inflation for goods should be peaked by the first quarter of 2026. We should start to see those prices coming down in the back half of next year.” - Jerome Powell, 12/10/2025
The Fed has now cut a total of 175 basis points since September of 2024, bringing the Fed rate down to around 3.5%. With concerns of inflation dissipating it seems like all of the focus is now on the labor market and unemployment, at least until the FOMC meeting minutes were published. The notes showed that there is strong disagreement on the board between cutting rates and holding them where they are. Phrases like “for some time” and “nicely balanced” showed up often regarding rates at their present levels, prompting betting markets and investors to believe that rates may stay where they are for the foreseeable future. As of now, Kalshi betting markets are showing an 86% chance that the Fed holds rates at current levels.
Retrieved from https://kalshi.com/category/economics on 12/31/2025.
We don’t believe that rates will hold steady, we believe the Fed will continue to cut. They may not cut in January, but with the labor market showing signs of significant weakness, coupled with strong overvaluations in the stock market, the cutting cycle needs to continue. Let’s talk jobs.
The labor market is weakening. Unemployment has been rising since April 2023. Granted, in April 2024 the unemployment rate was only 3.4%, and even now it is only 4.6%. What is more concerning, as we’ve always said, is the rate of increase, not the final number. Just like we heard about inflation being transitory in early 2022, we’ve also heard pundits talk relentlessly of a “soft landing”. Well, the unemployment rate has started to rise above this soft landing narrative. The labor market has been increasing in momentum and has gone from 4.1% in June 2025 to 4.6% in November. We’ve been following the unemployment rate for a long time now, very closely, and what we’ve decided is that the rate of increase has become worrisome. Back in October we posted this quote along with the following chart:
Going back to at least since 1996, unemployment has never risen at a rate of 16% or more YoY without a recession taking place after. The chart below shows this paradigm. But, if you have more confidence in the total number and you still think that 4.3% is low, allow me to also inform you that since the year 1996, anytime unemployment has RISEN to 5% or higher a recession also takes place.
And now, there is more data to support our conclusion, perhaps with more name-recognition than our chart. The Sahm Rule Recession Indicator is a measure of economic recession that has never failed. It measures unemployment on a three-month rolling basis. When unemployment rises more than 0.5% in a given three-month timeframe, a recession always ensues. The current level of the Sahm indicator is 0.43%. Here is an updated Sahm chart.
Retrieved from https://www.tradingview.com/chart/PAIfo4NN/?symbol=AMEX%3ASPY on 12/31/2025.
January 2026 will give us crucial unemployment data that will either confirm or reject the Sahm rule. On December 19 we posted this:
We will give you one more piece of fascinating economic insight on this phenomenon. With the current unemployment rate, the Sahm rule will be triggered next month even if the unemployment rate STAYS FLAT OR DECREASES. In order for the rule to trigger, the rolling 3-month average needs to hit 4.50%, just 0.07% away. Now, with October unemployment coming in at 4.4%, and Novembers at 4.6%, a December rate of 4.4% will make the 3-month average 0.5%! In summary, an unemployment rate of 4.4% for December is all that’s needed to trigger the indicator. All the Sahm rule really observes is unemployment momentum. Unfortunately, that momentum appears to be accelerating faster than anticipated by expert economic analysts.
The BLS Unemployment data for December will be published on January 9, 2026 at 8:30am EST. Mark your calendars and follow us on X because we will be bringing you live updates. We believe the Sahm rule WILL be triggered. And, even though no major outlets are talking about it, we assure you that if/when it is triggered every major headline will have the word “Sahm” in it.
Shifting gears to equities we want to touch on big tech and AI, how they performed in 2025, and where they stand for 2026. Big tech remains the undisputed heavyweight champ in the markets. Companies like NVDA 0.74%↑, GOOGL 0.40%↑, and AVGO 5.49%↑ all massively outperforming the S&P 500 and Nasdaq indices. For multiple years now AI-related stocks have been a safe haven for massive capital gains, but that reality is changing. We saw billions of dollars in mega deals invested into OpenAI to take advantage of ChatGPT, we saw the rise of Google Gemini, X’s Grok, and other AI assistants. However, 2026 appears to be shaping up for the enablers trade. By enabler we mean companies that allow AI to grow and sustain itself. 2026 won’t be a year where everybody is talking about who offers the best chatbot, it will be a year where everybody is talking about who offers the best solution for data storage and memory. The single best performing stock in the S&P 500 in 2025 was Western Digital WDC 0.76%↑, and they offer data storage solutions. There appears to be a bottleneck between AI growth and storage, companies that can offer solutions to this problem are set to perform extremely well.
In Short
The next 12 months are gearing up for significant changes in the markets. After years of inflationary spirals and hawkish Federal Reserve policy we are now witnessing a weakened labor market and rate cuts. There are clear red flags in the economy which suggest a possible recession in 2026. Big tech valuations have been extremely high for multiple years now, and we are beginning to see those valuations finally cool. Investors are beginning to realize that AI cannot expand and meet these high expectations without the infrastructure to support it. Companies that provide this infrastructure will do exceptionally well in the future, and we will be keeping our eye on them.
Thanks for reading, until next time.
Good luck and Godspeed.
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