A Year Without Backstops—Why Investors Must Stop Waiting For The Fed In 2026
KEY TAKEAWAYS
2025 removed both the Fed Put and the Trump Put from investor expectations, but they came back
Tariffs created volatility and one-time price shocks, not runaway inflation
Markets rallied primarily on earnings strength and economic resilience, not policy support–yet
The Fed is near neutral with limited room to cut rates in 2026
Portfolio composition will matter more than monetary policy going forward
MY HOT TAKES
Investors continue to over-attribute gains to policy and under-attribute them to execution
Rate cuts are no longer a reliable engine for equity upside
Much of the optimism for 2026 has already been pulled forward into prices
The Fed is now a supporting character, not the lead actor
Winter markets will reward selectivity and punish complacency
You can quote me: “The most dangerous thing an investor can do in 2026 is wait for the Fed.”
Winter is coming. If you like cold and snow, New York City is a glorious winter wonderland at the moment. According to my local news meteorologist, it’s still technically autumn. Regardless, it’s cold and quite winter-like outside and it's still just December. Today, we start the last full trading week of 2025, and I must add, what a year it has been! I spend a lot of time speaking with journalists and in front of cameras, and I can tell you that this past year stood out as a unique one with behind-the-camera / off-the-record banter with seasoned media folks, which was mostly in the realm of “what a crazy year.” That started way back in early March. There was a lot of excitement leading up to the Presidential elections of 2024 culminating in a bit of tension as we marched up to the inauguration. The day after the inauguration you could feel that tension lift as Wall Street turned around, pressed its shoulder to the plough, and readied itself to take full advantage of what promised to be a golden age.
A market friendly President, promises of tax cuts, hopes for less regulation, steady disinflation, a strong labor market, a freshly pivoted Fed, and the rapidly emerging AI ecosystem were all poised to turbo-charge gains in 2025. Then it all came crashing down. Warning shots were fired almost as soon as the President set up his pictures behind the Resolute Desk in the Oval Office. Tariffs. At first it was a noise–a thump–heard off in the distance. It could have been mistaken as anything–political rhetoric, a hat tip to a group of supporters–it couldn’t possibly be the worst case scenario, a full-blown, frontal trade assault. But alas, it was, and Wall Street was not prepared for it–emotionally at least. It was, indeed, full-blown and for sure frontal. No one escaped the President’s ire. He would double and triple down. Stocks were hammered as traders speculated what the strike price of the so-called Trump Put was. In other words, when would the President notice the tanking markets and back off to cause a rally. By mid-March even some of the most seasoned traders were scratching their heads wondering if the Trump Put was no longer. Meanwhile, and almost simultaneously, the Fed decided to pull its Fed Put, leaving no emotional backstops for investors. It was early spring but the chill in the markets was palpable. By April 8th, it looked like it was going to be a stormy spring followed by an unpleasantly hot summer. But it wasn’t to be.
The Trump Put, got a glow-up and was renamed the TACO trade.TACO is short for Trump Always Chickens Out. It sounds like a negative thing, but it was anything but that for the markets. Once traders realized that the President was willing to negotiate, stocks took off on an epic rip. Meanwhile, over at Fed HQ, the superbankers laid limp–mired in indecision–wondering what to do. Would tariffs cause inflation to spike back to the nosebleed heights of a few years ago? We all know that companies pass tax increases on to consumers. Tariffs are tax on US companies, so it stood to reason that consumers were about to get hit with that bevy of new tariffs that would slowly but surely hit US manufacturers and resellers.
The Fed reasoned that tariffs would cause inflation to get away from them and ultimately cause the economic turmoil the Fed is charged with avoiding. The Fed was determined to head off that inflation by keeping rates restrictive–doing nothing. In that case, though no one called it that, the Fed essentially pivoted back into hawk mode by halting the cuts it started in late 2024. But, unfortunately, restrictive Fed policy is mostly only effective on consumer inflation. Tariffs would, if anything, cause supply-push inflation and while prices could have jumped, it is not accurate to describe tariffs as being inflationary in a strict sense. You see, steady inflation is bad–really bad. One-time price increases are also bad, but not quite as bad. Using the silly math that we use to calculate “inflation” any of those price increases from tariffs would start to diminish in 13 months. To be clear, prices would still be higher, but that number that everyone is so obsessed with–“inflation”--would begin to diminish and eventually disappear altogether, because of the base effect, which I have written about often. Search for my videos on it online to get a refresher.
The rally ensued without the Fed. Crypto assets, meanwhile, found new highs and new math was invented to justify it. 😉 The AI ecosystem trade accelerated and valuations hit uncomfortable levels. Supporting valuations were three blowout earnings seasons. In fact, strong earnings were not limited to technology. Despite the “challenging” trade environment, companies found a way to thrive. The economy grew faster than expected as well. Consumers continued to consume and companies continued to invest. Oh, and inflation, picked up a bit, but nowhere near even the lowest estimates. The labor market slowed a bit and the Fed could no longer hide behind its "tariff inflation” narrative. It was time to get back to normalizing rates. The administration exacted unrelenting criticism of the central bank through next-level jawboning. The market slowly became obsessed with the Fed and rate cuts.
One may argue that stocks got a bit ahead of themselves. To be sure, rallies in some stocks were clearly justifiable, but maybe perhaps a shallower ascension vector might have been more comfortable for the passengers. But, “no worries” as the Gen-z’s like to say, we still had the Fed. Markets raced up the mountainface toward the peak.
That brings us to where we are today. Markets have raced out of base camp with limited provisions. Knowing that it will take far more than one or two rate cuts in 2026 to get us to a new peak, and markets raced higher yet.
And here we are. On a cold, snowy mountainside with very little in the way of fuel. 2026 is expected to be a solid year for the economy. Fiscal stimulus is about to kick in from the One Big Beautiful Bill Act, continued AI CAPEX, smaller trade deficits, and the Fed. The Fed? Can we even consider the Fed anymore? Rates are rapidly approaching what many economists call "neutral" and the Fed itself has projected just one single rate cut in 2026. That is supported by its upward-revised GDP, downward-revised inflation, and unchanged unemployment rate. That means, in plain language, that the Fed is not worried about inflation or unemployment and that it expects the economy to perform well. If that is the case, we may be lucky to even get the one rate cut markets are hoping for next year. Will a Trump-installed Fed Chair change that trajectory? The Chair only has one vote of twelve, and I might remind you that Powell is a Trump appointee. In other words, no, a Trump devotee will not materially impact the Fed Funds rate.
Year-end is nigh. That means the reports of what to expect next year are starting to fly. We are on that cold, dark, and snowy slope. You look up and see the peak in the far distance. Far! You check your pack. Water is scarce as is food. Oxygen is very low. You wonder if you can reach the peak. Just then you turn your gaze back to base camp. It too is very far away. You wonder if you could even make it back to base camp with your supplies. Folks, this is not doom and gloom, this is a reminder to look at what is important in your pack as we get ready for 2026. Fuel in the way of Fed cuts would be good, but it is the names in your portfolios that will get us to the peak. Stop focusing on the Fed. Winter is long and my friends, it is upon us.
FRIDAY’S MARKETS
Stocks got clobbered on Friday as an overblown AI trade caused panic-selling. Long treasury rates climbed and the yield curve steepened. Traders continued to rotate into defensive sectors ahead of a big week of economic numbers.
NEXT UP
NAHB Housing Market Index (Dec) may have risen to 39 from 38
Don’t kid yourself, we still have some important earnings! Also, we will get ADP NER Pulse, weekly Jobless Claims, Retail Sales, November’s monthly employment report, housing numbers, Consumer Price Index / CPI, and University of Michigan Sentiment. Download the attached weekly economics and earnings calendar to ensure that you are the sharpest tool in the shed–they always win. 🏆
Fed speakers today: Miran and Williams
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