Happy New Year. We thought it would be helpful to provide a recap of 2025, how we navigated its unique challenges and our thoughts on 2026.
2025: A wild, but ultimately rewarding, ride.
After two years of strong returns for stocks, investors were unsure what the new year would hold. While inflation and interest rates continued to decline, there were still plenty of uncertainties. Global unrest continued as conflict raged in Ukraine and the Middle East. After a contentious and polarizing presidential election, the new administration assumed control and promised big changes to come. The changes would ultimately be far greater than expected.
Things were uneventful for a few months as Cabinet nominees and diplomats were named and oddly, the U.S.’s highest mountain and the former Gulf of Mexico were renamed. By spring, all heck started to break loose. “Liberation Day” was announced calling for massive tariffs on practically all trading partners. Fearing a protracted trade war, investors bolted for the exits. The S&P 500 fell roughly 18%. The NASDAQ Composite tumbled almost 25%. The declines erased the gains of early 2025 and most of the gains of 2024. It wasn’t just stocks that were hit. In the chaos, margin calls led to leveraged players selling anything they could. Bonds were drawn into the turmoil as it was feared tariffs would lead to a spike in inflation. It was plain ugly across the board.
In this decline and in many others over our years together, discipline and restraint have been the right course. Soon, it was announced that many tariffs would be reduced or delayed. Talks with trade partners were held seeking compromise. Once the shock subsided, investors again focused on the positives. Earnings were strong. Interest rates continued to fall, and the transformative possibilities of artificial intelligence beckoned.
In defiance of the calls of doom along the way, markets had not only recovered losses but surged to new all-time highs. You can’t make this stuff up. The S&P 500 jumped 18% for the year. Smaller stocks, as represented by the Russell 2000 Index, advanced 13%.
The EAFE MSCI index of international stocks soared over 31% for the year. Bonds also joined the party. Given the increased focus on lower inflation and FED rate cuts, the Barclays Aggregate, a measure of the broad bond market, advanced a solid 7%.
What to expect in 2026
Volatility is here to stay. Things could easily get unpleasant again. This isn’t a surprise. The possibility of significant declines never left. Since 1950, the S&P 500 has experienced an average 14% drawdown per year. Despite this, returns were positive 73% of the time. So, historically allocating money to stocks has been a great deal but one must quantify a myriad of risks. We have tools for that.
More change is coming. A quick check of recent headlines makes that clear. A partial list includes the aftermath of the military actions in Venezuela, rising possibilities of intervention in Iran and Cuba and a simmering dispute over FED independence. Perhaps most concerning to markets in the near term is that the Greenland sovereignty issues could escalate into new tariffs and an existential NATO crisis. The list goes on and on. Given all this uncertainty, what is an investor to do?
There are steps one can take. First, we don’t react to short-term market movements. We know of no one who predicted the tariff sell-off nor the massive recovery. It is likely that if one had sold near the lows and didn’t get back in until a comeback was apparent, it could take years to recover. We’ll pass on that. Long-term money requires a long-term strategy.
Also, we remain objective. Political tensions are running high. We don’t try to predict political outcomes. While we may care deeply about the right direction for our country, we try to keep money and politics separate. Combining the two may detract from both. We concentrate our efforts on optimizing investment returns while controlling risk. That is hard enough.
Stay diversified. Over the past few years, we have commented that international stocks and bonds had not added much to portfolio returns. This is likely because of the mad rush into artificial intelligence stocks. Many people gave up. We didn’t. Patience and diversification are two of our core principles. Diversification doesn’t always work in the short term; it can both lower risk and raise returns over the long term. We are pleased to see clients rewarded for their patience.
Just as important as any other principles is our knowledge of you. All those questions over the years about tax brackets, spending rates and your children and grandchildren, were for a reason. It is important for investment planning but also, once markets turn difficult, it’s important to know who you’re fighting for.
2025 was a good year but we don’t judge our success in calendar years. This is intergenerational wealth. We have a long way to go.
Thank you for the trust you have placed in us. It is an honor to serve your family.