Comments based on information available as of 7:30am CT on 1/2/2026
The Year of the “Iron Jaw” 
A boxer with a glass jaw is easily stunned and knocked down. This year, markets showed an iron jaw: plenty of punches landed, but nothing knocked them out. Despite tariff shocks, a government shutdown, and AI jitters, the S&P 500 (a broad U.S. equity benchmark of large stocks) still finished up ~17% for 2025.
Early on, China’s persistent deflation and a January AI‑arms race kept volatility elevated. China’s CPI ran below zero on a year‑over‑year basis at multiple points in 2025, while producer prices stayed in deflation, signaling soggy demand. Meanwhile, the debut of DeepSeek triggered a sharp, global tech sell‑off in late January as investors questioned whether the AI capex surge had overshot—Nvidia fell ~17% in a day and the NASDAQ dropped ~3%. Those losses were largely retraced in the weeks that followed.
Then came the Rose Garden moment. On April 2, President Trump unveiled his “Liberation Day” tariffs with a posterboard of “reciprocal tariff rates” and a new 10% baseline tariff. Markets sold off hard the next day, but then recovered as parts of the plan were suspended and negotiations began.
The One Big Beautiful Bill Act was signed into law on July 4, giving may people and businesses not only tax certainty, but also some tax relief. By mid‑summer, the economy looked like it was “bending, not breaking.” The big development in late August and early September was confirmation that the labor market had been weaker than thought, with sizeable Bureau of Labor Statistics (BLS) payroll revisions and a softening in hiring. After a nine‑month pause, the Fed cut its policy rate in September, framing it as risk management given rising downside risks to employment. That breathed new life into small‑caps and other rate‑sensitive areas.
October’s government shutdown initially looked like noise markets could ignore. As it stretched on—disrupting data releases—the Fed’s internal divisions sharpened and risk appetite faded, producing a choppier November tape before momentum resumed into December.
As for the Santa Claus Rally, it’s never guaranteed. Last year (2024) it failed; this year’s seven‑session window has been mixed across days, even as indices hovered near records into the holidays. Historically, that late‑December/early‑January stretch is positive about ~79–80% of the time with ~1.3% average gains, but it’s not a promise.
Looking Forward
The wall of worry is still high: consumer sentiment is down from a year ago and unemployment has drifted higher while valuation measures imply a high bar for earnings delivery. Offsetting those risks: tax refund season should start soon, and the One Big Beautiful Bill Act put powerful capital‑investment incentives in place—permanent 100% bonus depreciation for most equipment and immediate expensing for domestic R&D—likely pulling forward some long-run capital expenditure plans. With that backdrop, I’m constructively cautious: a good defense doesn’t mean cowering in cash; it means sticking with quality, being mindful of valuation discipline, and expecting early‑year air‑pockets if 2026 earnings guidance doesn’t meet the market’s already‑lofty expectations.
