BACK
Fourth Quarter Review: The trend of positive performance dispersed across most asset classes continued in the fourth quarter, albeit with less vigor than the prior two quarters. In the equity benchmarks, the Standard and Poor’s 500 Stock Index gained 2.7%, the Russell 2000 Small Cap Index returned 2.2%, and the MSCI All World ex-US international index capped off a stellar year with a 5.5% gain. The Bloomberg Aggregate Bond Index returned 1.1%, Gold jumped 11.5%, and the Bloomberg Commodity Index rose 5.2%. A healthy broadening of market participation kept the equity indices in their uptrend as the healthcare, telecom, materials, and financial sectors took the baton from technology and consumer services. Value benchmarks outperformed growth across large, mid, and small capitalizations. The Federal Reserve again reduced their Federal Funds rate target to a range of 3.5% to 3.75%. The Fed continued to be accommodative, cutting rates by 0.25% in both October and December even with the equity market at all-time highs, inflation above the Fed’s stated 2% target, and the unemployment rate at 4.3%.
2025 Review: The global markets snapped back from a rough start to the year through the early April “tariff tantrum,” and 2025 ultimately offered a constructive portfolio backdrop with most asset classes posting returns above their long-term averages. The S&P 500 Index returned 17.9%, the Russell 2000 Small Cap Index 12.8%, the MSCI World ex-US International Index 33.2%, the Bloomberg Bond Index 7.3%, Gold 64.6%, and the Bloomberg Commodity Index 15.8%. Monetary and fiscal stimulus, the buildout of AI infrastructure, and relentless strength in high-end consumer spending have all supported resilient economic growth that defies the three-year-long negative trend of the leading economic indicators. Strong corporate earnings and expanding profit margins have supported equities, with overseas markets getting an extra boost from carrying lower valuations at the outset of 2025 and a 9.4% decline in the dollar index during the year. The global economy is expected to maintain its momentum in 2026 as the International Monetary Fund projects 3.3% global growth. The Fed’s “Dot Plot” shows one interest rate cut during the year.
Your Portfolio: We are blessed to manage over $3 billion in assets for our clients, with each of you presenting your own goals and time horizons. Overall, we have seen significant portfolio growth, especially in more seasoned portfolios. We have gotten two crucial themes correct by significantly over-weighting the U.S. equity markets versus the rest of the world, and by avoiding the extended periods of negative returns from bond investments. Due to the recent market strength (the S&P 500’s three-year trailing annualized return of 22.9% is one of the highest on record), our portfolio activity has been elevated as positions hit our price targets and stocks or asset classes hit exposure limits. This has given us the perfect opportunity to re-examine your portfolio within the context of your current situation and time horizon. This is particularly important if we are managing your core assets and you are in withdrawal mode. Our investment process is totally focused on you achieving your goals, and not the numbers on a scorecard. Please let us know if you would like to discuss this.
The Markets: The U.S. equity market is overvalued by virtually any measure. The S&P 500 Index is currently trading at 22 times forward earnings versus a thirty-year average of 17. At the same time, market participants are very bullish, which concerns us from a contrarian perspective. The early January BofA money managers’ survey revealed record low cash levels that placed the indicator at the “hyper bull” level. From our perspective, we are nevertheless finding investible companies and categories offering a compelling return profile. The advent of new technology often leads to great businesses being discarded for the new theme. As such, the opportunities we are seeing are mostly in sectors away from the AI trade, which is also the main culprit in the overvaluation. We are not espousing a move back into bonds, which bear the overhang of an increasingly indebted world. The Federal Reserve has lowered the Fed Funds target by 1.75% since September 2024 to the current range of 3.5% to 3.75%, with another cut expected in 2026. However, market rates, as illustrated by the Ten-Year Treasury note, have risen in this time by 0.50% to 4.2%. This is partially a result of the exploding debt burden of the United States, with outstanding debt now at $38 trillion versus $6 trillion in 2000. The extraordinary rally in gold, up 130% in the past two years, is a bit of a red flag reflecting a global hedge against weakening fiat currencies, excessive debt, and geopolitical upheaval. Thank you for your continued trust, and we wish you a happy, healthy, and rewarding 2026. We welcome the opportunity to discuss your portfolio in detail.