Economic Commentary
The 2026 Economic Outlook and Federal Reserve Policy
The economic trajectory as we exit the year remains constructive, characterized by a fundamental shift in the Federal Reserve’s policy dilemma. The central factor is the broadening disinflationary trend, particularly as shelter inflation eases, which fundamentally alters the Fed’s reaction function. This cooling inflationary backdrop gives the Fed significantly more latitude to respond to any softening in growth or the labor market, bringing rate cuts into clearer view. Near-term economic data, while noisy, remains consistent with an ongoing expansion, supported by solid productivity gains. If productivity can hold up while nominal demand gently cools, we achieve the ideal scenario: inflation falling without requiring a painful economic contraction. Looking ahead to 2026, I remain confident that the Fed has room for additional easing, expecting the policy rate to move toward the low-3% range over time. However, this easing will not equally translate to the long end of the curve; the 10-Year yield is likely to remain anchored near the low-4% area due to structural term premium and issuance pressures, creating a favorable, yet realistic, environment for both equities and fixed income. Nevertheless, investors must remain vigilant regarding genuine policy risks, including both the potential market disruption from Supreme Court decisions regarding tariff uncertainty and the recurring fiscal funding deadlines in Washington, which introduce avoidable, confidence-denting shocks.
Investment Commentary
Equity Market: A Year of Strong Returns and Hidden Volatility
2025 delivered exceptionally strong returns, qualifying as a very good year that saw the S&P 500 surge +18%, comfortably surpassing its long-term average. This performance was broad, with the Nasdaq at +21% and the Dow at +15%, and all eleven sectors ending the year in positive territory. Critically, we observed improved breadth, with roughly two out of every three stocks rising on the year, indicating a less singular reliance on mega-cap technology than in prior periods. However, this headline performance masks intense, episodic volatility. The return/volatility ratio of 1.0, while objectively good, fell short of recent years, and several severe left-tail events during the year demonstrated the significant degree of difficulty in tactical risk management.
Fixed Income Market: Peaceful Outcome Amidst Structural Debt Concerns
The fixed income market surprised many in 2025 by delivering a generally fine year, characterized by unexpected stability in the face of immense and growing sovereign debt burdens. The Treasury curve executed a twist-steepening motion, with the critical 2-year note yield dropping 77 basis points (bps) and the 10-year yield falling 40 bps. We view this relative peace as a significant win, as it allowed the traditional 60/40 portfolio to deliver a healthy 14% return. Yet, this stability should not breed complacency. The impressive performance of non-yielding assets, particularly the stunning 65% surge in gold, signals underlying investor anxiety regarding currency strength and debt sustainability—a critical signal we cannot ignore as we look ahead.
2026 Outlook: Navigating Lower Returns and Volatility
As we move into 2026, the playing field has demonstrably shifted, and we anticipate a year defined by lower expected returns and higher volatility. The ante has been upped across the financial dashboard. Valuations are historically stretched, with high P/E ratios and corporate credit spreads compressed to very tight levels. Structural risks are intensifying, highlighted by increasing sovereign debt loads globally. Furthermore, the combination of astronomical AI spending and a speculative retail investor base introduces significant fragility. While the underlying trend towards growth and innovation remains, the high starting point across almost all metrics suggests that achieving double-digit returns will require much harder yardage. This environment rewards skill, and sophisticated investors who prioritize strategic selection can find exceptional opportunities for alpha generation. Specifically, alpha will be found by exploiting the valuation arbitrage between the crowded U.S. Mega-Cap (Mag 7) growth segment and the mission-critical hardware providers in Korea and Taiwan, while simultaneously targeting structurally reforming Financials and Industrial sectors in Europe and Japan.
Wealth Planning Commentary
Freezing Your Credit:
Happy New Year! As we begin the New Year, I want to bring to your attention basic blocking and tackling this year. I am starting off the new year with by explaining why all of us should have in place a credit freeze at the three major credit firms.
Freezing your credit is free, it is easy to do, and unfreezing your credit for a period of time is quite simple. I have personally experienced temporarily unfreezing my credit recently.
Freezing your credit with the three major bureaus—Equifax, Experian, and TransUnion—is one of the most effective measures to prevent identity theft. A credit freeze, also known as a security freeze, restricts access to your credit report, which means most lenders and creditors cannot view your credit history. Since businesses typically will not open a new account without a credit check, this process effectively stops identity thieves from opening fraudulent credit cards, loans, or utility accounts in your name, even if they have stolen your Social Security number.
Placing, temporarily lifting, or removing a credit freeze is entirely free for all consumers. Crucially, freezing your credit does not impact your credit score, nor does it interfere with your ability to use existing credit cards or view your own credit reports. It provides a robust layer of protection compared to paid “credit locks,” as freezes are legally mandated and offer consistent federal protections across all three agencies. While it does not protect against fraud on existing accounts, it serves as a critical “digital lock” against new account fraud.
To ensure comprehensive protection, you must contact each of the three bureaus individually to initiate a freeze. If you decide to apply for new credit, such as a mortgage or auto loan, you can temporarily lift your credit freeze by visiting the bureaus’ websites or calling them. These requests are often processed within an hour when done online, allowing you to regain access for legitimate lenders while keeping your identity secure the rest of the time. You can manage your freezes directly through the following official portals: