Wow, what a year! The economic story of 2025 was mostly one of tariffs and artificial intelligence, and the two converged, creating a gut-wrenching rollercoaster in the stock market. I’ve spent most of the past two years telling all of you that presidential elections don’t change the direction of an economy, and so far, that has held true.
Many times during my All-Client Zooms, I’ve redirected your attention away from what the President or Congress was doing and toward the Fed, telling you repeatedly that they swing the “biggest stick” in our economy. Now, as we look to 2026, the economic story in the U.S. will be defined by whether the lines between the fiscal policies of our political branches and the apolitical monetary policy of the Fed begin to blur.
Reasons to Be Optimistic
The Fed’s control of short-term interest rates—and its resulting influence on long-term interest rates—has a huge impact on our economy. As the Fed continues lowering short-term interest rates through 2026, it will make it cheaper for business owners and consumers to borrow money. This encourages business owners to invest in growth (i.e., hiring new employees, leasing office space, buying equipment, etc.). That activity is key to continued economic growth and future stock appreciation.
That said, we stand at either the precipice or the genesis of artificial intelligence. Every time I feel overwhelmed with optimism over the hours ChatGPT has saved me, a small part of me flashes to Hollywood AI-apocalypse movies. Somewhere in my gut, it feels like we could go either way with it. Since this paragraph lies squarely in the “Reasons to Be Optimistic” section, I’ll go with that.
About 18 months ago, we shifted your portfolio away from large U.S. stocks toward small U.S. stocks. One reason for that move was the conviction that there was no way to guess which of the “Magnificent Seven” would win the AI war, but that whoever did win, small companies would reap significant profit increases from AI implementation. Looking ahead to 2026, I’ve grown even more committed to the upside of that trade.
I believe that with most of the trade-war uncertainty behind us, lower interest rates forthcoming, and the profit-enhancing power of AI, the most likely outcome for your portfolio is continued growth for another three years. All in all, I judge with modest certainty that next year will bring above-target returns for your portfolio.
But… What Keeps Me Up at Night
My biggest concern as we look to 2026 is the potential politicization of the Fed. It really doesn’t matter which party has the upper hand—there are no historical or global examples of anything good coming from political control of monetary policy in a free country. The inevitable short-term incentives for political wins at the cost of long-term economic health simply can’t be reconciled.
Sure, it can work in single-party systems like China or authoritarian regimes where there is no short-term risk of losing political control, but that’s not how Americans do things (thank goodness).
Finally, as I wrote in my newsletter last month, the systemic risk posed by the growth and integration of cryptocurrency into our financial system is concerning. Its growth and current market capitalization are one thing, but it’s also symbolic of a recurring cycle we’ve seen time and time again: reckless risk-taking, leading to inflated asset prices, ending in economic turmoil. The Great Recession of 2008 may seem like a long time ago, but the trauma from those hard-learned lessons runs deep.
Recently, during a discussion with a potential bond manager, I jokingly mocked him for pitching me on investing your money in “mezzanine tranches of collateralized loan obligations (CLOs).” He touted their minimal risk with outstanding yields. If that doesn’t ring a bell, the analog would be the plutonium that powered the bomb that blew up the world’s economy in 2008. Again, it’s symbolic of the investing world’s current numbness to risk.
In Conclusion
It’s my job to deliver the returns we’ve said you can expect, with as little risk as possible. To accomplish that, we stick to investment discipline: buy low and sell high. We avoid the investment “product of the month” and never speculate with your money. We are here as your fiduciary, acting in your best interest with every trade and with our best advice.
I’ve done that every year of my career, and that is what you can expect from me in 2026 and beyond.
Happy New Year!
