As we enter our 45th year in the business of serving clients with portfolio management, we are reminded how fortunate we are to work with people like you – you inspire, challenge, and elevate the work we do. We are truly grateful for your continued trust, support, and friendship.
Our best wishes for a Merry Christmas and Happy Hanukkah!
The AI boom has been the most pivotal driver of markets in 2025, and we don’t see that changing next year. However, there are some key hurdles being set up that promise to make the AI trade more volatile going forward.
AI is more important than ever to investors given the massive exposure across global equity markets. More than one-fifth of global market cap is directly linked to the success or failure of the technology. And the story is still building. The end of this year has presented major challenges to the narrative as capex explodes and credit markets recoil from the borrowing binge funding investment. Critics say that U.S. economic growth is largely dependent on AI capex. Actually, our economy is far less dependent on AI capex than the popular narrative assumes. Consumer spending has been driving our economy which is typical.
We think the current correction in tech and AI stock prices will soon pass and set up another good year in 2026. After all, investors go where there is growth and that includes tech and AI.
A bullish tailwind currently in the market’s favor is the behavior of the “three headed monster”: crude oil, the 10-year government bond yield, and the U.S. dollar. When all three charts are rising, they represent significant headwinds for the stock market. However, when all three are falling and are near 52-week lows, they are effectively giving the green light for the bulls. The current setup is very positive, with all three near the bottom of their 52-week ranges. This bullish backdrop is one reason why we remain excited going into 2026.
Note: The drop in oil is not forecasting a recession in our view. In the lead-up to recessions, crude oil is typically closer to its 52-week high – maybe a bit counterintuitive.
THE 60/40 PORTFOLIO IS ALIVE AND WELL
The 60% equities/40% fixed income portfolio has been the classic asset mix for retirement accounts for many decades. Sixty percent in equities is enough to propel portfolios higher in good stock markets yet a full 40% in bonds is enough to cushion the blow in bad equity markets (given bond prices often rally when stocks go bad).
However, 2022 called this strategy in to question by the “experts.” Both stocks and bonds declined with 2022 ending up as the second-worst ever for the 60/40 mix.
Wall Street then analyzed this mix in every way possible. Was a 60% allocation to stocks too high? Too low? The same for bonds. In fact, much of the analysis pointed to bonds being the real problem. Could bonds be counted on for stability in the future? Many said no. Instead, they said the 40% in fixed income should be re-allocated to a number of different asset classes including alternative investments such as private credit, currencies, precious metals, and crypto among other choices. Back testing showed these alternatives had less correlation to equities than bonds but not necessarily a better rate of return. Today many money management firms use a combination of alternative investments for the old 40% bond allocation.
How has the 60/40 mix done since 2022? We are pleased to report that the traditional mix seems to be back on track. According to Bespoke Investment Group, this year will complete three straight years of 10%+ gains based on benchmark computations. The long-term return on stocks is 11% per year so 10% for a balanced portfolio is very competitive. This trend looks likely to continue in 2026, in our view. We will continue to manage traditional 60% equity/40% fixed income portfolios where appropriate, including many retirement portfolios.