There's Always Tomorrow

As we enter the final few weeks of the year, it's a good time to look back on how markets may have surprised some investors and what we might expect from 2026.

Just buying the S&P 500 Index, albeit in an ETF form, wasn't necessarily the best strategy in 2025, contrary to some commentary. The inspiration for this week's musings is the 1964 Rankin & Bass TV special "Rudolph The Red-Nosed Reindeer." Here’s some trivia about the show:

• This show first aired on December 6, 1964 on NBC. It was sponsored by General Electric and many of the elves in the show also appeared in the GE commercials that aired during the show. The response from viewers was so strong that the show would begin airing annually the following year.

• The holiday classic song "Rudolph the Red-Nosed Reindeer" was actually written in 1939 and skyrocketed to fame in 1947 with Gene Autry's recording.

• Sam the Snowman, who sings and narrates the show, was a late edition when Burl Ives became available. Originally, Yukon Cornelius, voiced by Larry Mann, narrated the show and sang most of the songs.

• Two of the original puppets used in the show were found in the attic of an employee of Rankin & Bass and were sold at auction in 2020 for $368,000.

• This show is the longest continuously-running Christmas special in the United States, airing each year since 1964.

Here's what we've seen so far this week...

There's Always Tomorrow. Rudolph is told by his friend that there's always tomorrow and sings him the song of hope that dreams come true. You would have thought that

the market would feel this way now that the Fed indeed delivered a 3rd rate cut this week. But, oh no, there's debate now about whether the cut was a "hawkish cut" or a "dovish cut." I think we as human beings just need something to complain about all the time. The reality is, the Fed likely delivered a Christmas present to the markets. There's now some breathing room for lower-end consumers affected by interest rates and sufficient liquidity for markets moving forward. In fact, according to Bank of America, the Fed has accomplished a balance between inflation and employment, also known as the "Taylor Rule." The Taylor Rule was designed by John Taylor in 1993 that prescribes a value for the Fed Funds Rate in relation to inflation and economic slack. According to BoA, that's exactly where rates are after Wednesday's rate cut.

That being said, there is a lot of dissention among Fed members. Wednesday's decision had only 2 dissenters to leave rates unchanged, yet the December "Dot-plot" showed

6 members actually felt rates should be left unchanged. Powell on Wednesday stated, "The division (on the Board) is between holding rates steady from here versus cutting." And yet, most of Powell's comments verified an economy that is stable. On inflation he said, "From here, the peak should be a couple of tenths (10 basis points) higher, or less on inflation." On employment he stated, "The unemployment rate may only tick up one, two more tenths." If those two statements prove to be true, then both inflation and unemployment would be running below their historical averages, meaning recession is still some distance away.

Whether one wants to classify Wednesday's decision as a "hawkish cut" or a "dovish cut," the market has been responding with positive returns. In 5 of the last 6 rate

cuts in this current cycle, markets moved higher, except for the cut just two months ago due to unclear language from the Fed (which we have covered in previous posts). We are likely to finish the year on a positive note, but 2026 may be a little up in the air. So far, the Dot-plot shows 1 to 2 rate cuts in 2026, however, the President will get to nominate a new Fed Chairman, which could shift the Fed more dovish. Then again, equity markets tend to be a bit choppy in Mid-term Election years. There's always tomorrow.

Silver & Gold. Burl Ives sings of silver and gold in the TV special and how everyone wants the shiny metals on their Christmas tree. Well, that's what investors got this year as both of the

precious metals vastly out-performed the S&P 500 Index this year. In addition, international stocks out-paced the S&P as Fed rate-cutting led to a declining dollar. The last two months saw Silver explode higher, leading the S&P 500 Index by more than 100% in 2025. Similarly, Gold has been on a hot streak the past 26 months and is beating the S&P by at least 45% year-to-date. International stocks have also bested the S&P 500 this year, almost doubling the domestic benchmark's 2025 return. So, just "buying the index" wasn't necessarily the best strategy this year.

Since the market bottomed on November 20th, we've seen asset classes that were

lagging this year start to out-perform. While the S&P 500 Index is higher since the market bottom, mid-cap and small cap equities have out-paced the S&P. This is confirmed by the equal-weighted version of the S&P 500 Index, which is also out-performing the traditional market-weighted index. Small caps have out-paced the S&P by almost 600 basis points, while mid-caps have out-paced the S&P by at least 300 basis points. The top 7 names of the S&P, the Mag 7, are also lagging small and mid-caps since the market bottom.

One reason we may be seeing a shift in investing toward small and mid-caps is their recovery in earnings. Small caps in particular nearly caught large caps in terms of corporate earnings in the 3rd quarter and both small and mid-caps are expected to out-pace large caps in 2026. Another part of the tale is the fact that AI-driven names, especially represented by the Mag 7, might be getting a little tired as the expectation now moves from how much build-out of AI data centers will be completed toward how will AI companies monetize this new technology. For the time being, it looks like Santa might be riding his sled through Wall Street this December.

Here's Burl Ives singing the holiday classic from the TV special...

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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

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