Stocks turned in positive returns for the final quarter of 2025. Large domestic companies, measured by the Standard & Poor’s 500, gained 2.3%. The Russell 2000, a gauge of smaller domestic companies, rose 1.9%. The Nasdaq Composite, heavily weighted in technology stocks, advanced 2.6%. Foreign firms, generally speaking, also advanced with the Dow Jones World Index (ex US) up 4.3%.
While economic data was certainly mixed throughout the quarter, investor sentiment and demand for stocks remained sufficient to support overall stock valuations. Headline unemployment spiked to 4.6%. This is not a historically troubling number, but trending in the wrong direction. The latest CPI reading was 2.7%, also not a historically bad number but above the Fed’s target rate of 2.0%. The Fed, with a dual mandate of fostering employment and maintaining stable prices, on balance landed on the need to juice our economy. This led to two rate cuts of 25 bps each, and a current fed funds rate of 3.5% – 3.75%. More positive news hit as October GDP came in at 4.3%, well in excess of the 3.2% estimate. Keep in mind that much of the government data was considered suspect due to the prolonged government shutdown and delays in collecting and releasing of information. Investors had greater confidence in the generally more robust corporate earnings announcements, coming directly from the companies themselves. Demand for so-called “risk assets” continued through year-end, resulting in yet another calendar year of double-digit stock market returns.
So, what do we see heading into 2026? As alluded to above, we have experienced three consecutive years of extraordinary equity market returns. The academics among us would point out stretched valuations (price to earnings multiples, price to book multiples, dividend yields, etc.) and the concept of a “reversion to the mean”. That is, markets can’t go up endlessly and must experience an arguably healthy pullback from time to time. More bullish investors would point to the severe decline of last April’s “tariff tantrum” as the required cleansing event. These same market optimists would reference the likelihood of one, perhaps two more rate cuts in 2026, and the positive economic effects of the tax and regulatory enhancements of the latest tax bill that kick in this year. A convincing case, bull or bear, can be delivered by any skilled debater. The fact is near term market movements simply cannot be timed accurately and consistently over time. An attempt to do so leads to diminished portfolio performance over one’s lifetime. The successful long-term investor understands the value of adhering to one’s well-crafted portfolio, allocated to deliver the expected returns and volatility characteristics appropriate for that unique investor’s goals and objectives.
Please know that we welcome your calls, texts, emails, etc. And, as always, we adhere to our discipline of strategic asset allocation and style diversification; a strategy designed to mitigate overall portfolio volatility and enhance long-term returns.