Is Santa Coming this year? A Reality Check on a 2025 Holiday Rally

To our Clients and Friends -

We want to provide an update on the current financial markets and macro environment drawing on our own experience and additionally on the insights of respected global-macro thinker, Raoul Pal (founder of Real Vision and Global Macro Investor). Indeed, we’ve drafted several letters to you all in the past couple of months but, every time we went to edit and send, something else major changed and affected our forward view. (This was primarily Biff’s fault. Jeff provided several drafts which Biff couldn’t finish in time. Kudos - and apologies - to Jeff!)

As the holidays approach, investors may pin hopes on the traditional Santa Claus Rally — that seasonal uplift in stocks during the last five trading days of December and the first two of January. Historically, the S&P 500 has delivered an average gain of ~1.3% during this period (with positive returns ~79% of the time since 1950). After a volatile November, however, we might ask if Santa visited us early, in September, leaving gag gifts that went “poof” in our faces over the past week or so. Is there still holiday magic left for high-quality, profitable companies that got punished in the markets this Fall? What about poor cryptocurrencies?

Not Your Typical September, and then the November storm

Unlike the classic pattern of weakness in September/early October, which historically sets the stage for year-end strength, we experienced a relatively benign September and early October with the S&P 500 and Nasdaq locking in solid gains (3-4% in many sectors). Then came the mid-November pullback.

-       Hedge fund “guru” Michael Burry (he of Big Short fame) was reported to have put on over $1.1 billion in short positions on Nvidia and Palantir which fueled media narratives that the AI trade was "over."

-       In fact, Burry had put options written on approximately 1 million Nvidia shares and 5 million Palantir shares for $9 million.

-       No one can determine how much he lost when NVDA announced blowout earnings this week (Q3 revenue ~$57B, EPS beat, $65B+ guidance), with the media consensus is that Burry’s short AI bets have thus far been “dead wrong,” but we know it could not have been the reported $9 billion.

o   Don’t you just love it when the media can swing so quickly between narratives and not declare that it, the media itself, was “dead wrong?” But we digress….

-       Burry has since shut down his fund altogether.

The Nasdaq swung wildly intraday, closing down sharply amid broader liquidity concerns.

We don’t believe this was, nor is, the AI story cracking. NVDA remains the undisputed leader with demand far outstripping supply. Instead, aside from media hysteria and market queasiness over elevated AI valuations, we think the November pullback was also, maybe primarily, a result of liquidity being drained from the financial system at the worst possible time.

The Culprit: A Historic Government Shutdown and Liquidity Squeeze

2025 will be remembered, at least in part, for the longest U.S. government shutdown on record (43 days from October 1 until mid-November). The key impacts were:

• The Treasury General Account (TGA) ballooned to ~$900B+ as tax receipts flowed in but spending was halted.

• The Fed continued its quantitative tightening (QT), maintaining its monthly caps on Treasury and mortgage-backed securities roll-off ahead of announced plans to halt QT on December 1^st.

• The effect of reduced Government spending combined with Fed quantitative tightening resulted in a massive liquidity drain, amplifying volatility via higher borrowing costs in repo markets, pressuring risk assets, and leading to selling in equities/crypto.

The shutdown's resolution in mid-November has started a reversal of this situation. The TGA is already drawing down with resumed Government expenditures, and the end of the Fed's QT program next week will add even more reserves. This sets up a classic "liquidity rebound" into year-end.

Bitcoin: Leading the Liquidity Trade Lower...and Higher?

Crypto often acts as a high-beta proxy for, and has a high correlation to, global liquidity. BTC followed the "4-year halving cycle" script early (peaking ahead of schedule), but the real driver has been rates/liquidity all along:

• The current price as of November 21 of ~$84K is down sharply from recent highs but holding key support.

• We still see a high-probability bounce-back toward $100K+ into year-end as shutdown-related liquidity floods back and QT ends.

The "cycle" believers waiting for a 2026 bear market may be disappointed. We expect the liquidity cycle to continue to dominate the crypto space.

Our 2025/2026 Outlook: Santa Returns Not with Coal but Modest (and Volatile) Gifts

• Yes, Virginia, we believe a holiday rally is likely but tempered. The early "Christmas in September" stole some thunder, and lingering shutdown effects (plus the risk of another funding fight in January) means we won't see the stronger gains of prior years.

• We expect to see a rotation into undervalued quality names in underinvested sectors (energy, financials, industrials) alongside renewed gains in the AI leaders.

• The Fed is no longer staying "behind the curve" with QT ending soon and rate cuts coming to goose the growing economy, but keep an eye on inflation and employment numbers as government data production returns. The Fed’s “dual mandate” can cut in many different ways.

• We expect decent returns in 2026 but a choppier ride than 2024/2025's melt-up. Look for higher volatility from policy uncertainty, but the business cycle remains intact and in control.

In short, this will not be the Year Without a Santa Clause. Rudolph led the sleigh to town early and KK delivered some surprise gifts. With post-Shutdown liquidity now turning supportive, look for a year-end lift.

As always, we encourage a long-term perspective. Markets rarely move in straight lines, but the structural backdrop has rarely been more supportive of innovation-driven, Exponential Age assets. This includes, for qualified investors, alternative investments in cash-generative private credit, growth-capturing private equity and venture capital, and diversifiers such as natural resources and, in time, private real estate. For those of you investing with us in private investments, stand by for a series of really, really interesting opportunities.

Happy holidays, and may your portfolio and celebrations be merry and bright. 🦃🎄

Jeff & Biff