Markets pull back as Santa disappoints

Yes, Santa was on the roof last week but failed to come down the chimney. Instead of the Santa Rally, the markets experienced a four-day decline to end the week.

The expected year-end rally failed to materialize, disappointing investors. Profit-taking on some of the year’s winners sent precious metals, AI stocks, and technology overall into a skid. Yet, to be fair, the stock market had already run up prior to Christmas, hitting a record high on Christmas Eve.

In the scheme of things, four down days hardly mattered to the stock market that once again managed double-digit gains in 2025. Precious metals did much better than that, so some tax-loss selling prior to year-end should have been expected.

Heading into 2026, the landscape is changing somewhat. On the political front, the tariff issue may fade. Investors await a Supreme Court decision on the legality of Trump’s tariffs. The betting market gives the president less than a 30% chance of a favorable court decision. Many of the tariffs that have contributed to the affordability issue have already been quietly removed. I expect we will see even more tariffs removed in the coming months.

The Federal Reserve Bank will also be a factor. Much has been written about the president’s intention to appoint a new chairman who will be more closely aligned with his easy money interests. Trump has already succeeded in packing half of the FOMC committee with his choices. Normally, looser monetary policy is good for the stock market, but not always.

In addition, mid-term elections will likely present more market volatility the closer we get to that event. History says we should expect gyrations regardless of the outcome, which could cause some sharp pullbacks along the way.

We should also see a positive impact from the increased spending passed in the 2025 Republican spending bill. Between spending and tax refunds, already-reduced interest rates, and the potential for fewer tariffs, the economy should continue to grow in 2026. The administration is targeting a 3% real (inflation-adjusted) Gross Domestic Product (GDP) growth rate. Nominal GDP could be as high as 5%.

I expect the dollar to continue to weaken as part of the administration’s unspoken intention to keep it low enough to boost American exports. Inflation should remain in the 3% range unless interest rates under the new Fed are further reduced and/or quantitative easing becomes a reality. If that were to happen, it would cause a rebound in the inflation rate.

That would be bad for stocks and bonds, but probably good for commodities and precious metals. I believe this asset class still has room to run. At this point, however, I would expect a period of consolidation before a new leg higher.

One caveat is that the market, as represented by the benchmark S&P 500 Index, is getting expensive. It trades at 22 times forward earnings, which is above the long-term average. That may not be a problem, because many stocks trade below those levels, while a favored few trade above. A broadening out of the market into other areas outside of artificial intelligence and technology could keep the market going in 2026.

Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires.  Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI).  None of his commentary is or should be considered investment advice.  Direct your inquiries to Bill at 1-413-347-2401, email him at billiams1948@gmail.com, or visit his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.