Economic Outlook

July 17, 2026 by tto_portal

By: W. Kirk Taylor, CFP®

When Kevin Warsh was sworn in as Chairman of the Federal Reserve this past May, one of the first people he mentioned was Alan Greenspan.¹ The comment lasted only a few seconds, but it immediately caught my attention.

Warsh wasn’t simply paying tribute to one of his predecessors. He was acknowledging a very different philosophy of central banking, one that viewed communication as something to be used carefully rather than continuously.

For much of Alan Greenspan’s tenure, the Federal Reserve revealed relatively little about its thinking. Policy statements were brief, press conferences didn’t exist, and investors often learned more by watching what the Fed did than by listening to what it said. Greenspan believed a central bank should communicate enough to guide expectations while preserving the flexibility to respond as economic conditions evolved.²

Over the past two decades, that philosophy has largely been reversed. Today’s Federal Reserve communicates through policy statements, press conferences, economic projections, speeches and interviews, creating an almost continuous dialogue with financial markets. Investors now analyze not only interest-rate decisions but individual words, punctuation and subtle changes in tone, searching for clues about what policymakers may do next.³

Warsh has suggested the pendulum may have swung too far. Whether he’s right remains to be seen.

His comments, together with the recent passing of Alan Greenspan at age 100, brought back a memory that has stayed with me for nearly four decades.⁴

October 19, 1987

On October 19, 1987, I was a 21-year-old finance student at the University of Tennessee sitting in Dr. William Goolsby’s Real Estate Finance class in the Glocker Business Building. It was a beautiful fall afternoon, and I was enjoying my senior year the way most college students do. Dressed in khaki shorts, a T-shirt, a ball cap and flip-flops, I settled comfortably into the last row of the auditorium-style classroom, where I could always gaze out the window if my mind started to wander.

Graduation was still months away, and I was looking forward to spending time with friends rather than thinking too much about what came after college. Financial markets certainly weren’t at the top of my mind.

That changed the moment Dr. Goolsby walked into the classroom.

He looked unusually unsettled. Someone asked what was wrong, and he replied simply,

“The Dow is down more than twenty percent.”

At the time, I didn’t fully appreciate what those words meant. I remember thinking that a twenty percent decline certainly sounded serious, but I had neither the experience nor the perspective to understand that I was witnessing the largest one-day percentage decline in the history of the U.S. stock market.⁵

Nor could I have imagined that less than a year later I would begin a career that would carry me through the savings and loan crisis, the technology bubble, the aftermath of September 11, the Global Financial Crisis, COVID, the highest inflation in four decades and one of the fastest interest-rate tightening cycles in modern history. Looking back, that afternoon in Dr. Goolsby’s classroom became the first chapter in an education that no textbook could have provided.

I also realize now that I was witnessing something else. Black Monday became one of the defining moments in the relationship between financial markets and the Federal Reserve.⁶

The following morning, newly appointed Chairman Alan Greenspan issued one of the shortest statements of his career:

“The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”⁷

Although the statement contained only twenty-three words, it conveyed exactly what financial markets needed to hear. The Federal Reserve understood the seriousness of the situation and stood ready to provide liquidity to support the financial system. Those words were quickly reinforced with action as the Federal Reserve encouraged banks to continue extending credit and ensured that financial markets continued functioning normally.⁸

I’ve thought about that afternoon in Knoxville many times over the years. At the time, I thought I was witnessing an extraordinary day in the stock market. Looking back, I realize I was witnessing the beginning of a much broader lesson about markets, investor psychology and the role of the Federal Reserve.

The Briefcase Indicator

When I entered the investment business in 1988, the Federal Reserve operated very differently than it does today. There were no regularly scheduled press conferences after FOMC meetings, no quarterly economic projections and no “dot plot” showing where policymakers expected interest rates to go. Investors often had to infer the Federal Reserve’s intentions by observing its actions rather than reading its forecasts.⁹

That scarcity of information gave rise to one of Wall Street’s more entertaining traditions.

Before meetings of the Federal Open Market Committee, television cameras routinely followed Alan Greenspan as he walked toward the Federal Reserve building carrying his briefcase. Market commentators jokingly speculated that a thicker briefcase meant an important policy decision was coming, while a thinner one suggested a routine meeting.¹⁰

No one seriously believed the briefcase predicted monetary policy. What it revealed instead was how uncomfortable investors are with uncertainty. When reliable information is limited, markets have a remarkable ability to manufacture signals from almost anything.

Greenspan understood that instinct as well as anyone. His communication style eventually became known as “Greenspeak,” a term describing public remarks that often sounded precise while deliberately leaving room for interpretation. He later joked that if people believed they had clearly understood what he said, they had probably misunderstood him.¹¹

The philosophy became known as constructive ambiguity. The objective wasn’t secrecy. It was to communicate enough to guide expectations while preserving the flexibility to respond as economic conditions changed. In other words, Federal Reserve transparency came in shades of gray—perhaps even fifty shades of gray.¹²

That philosophy would gradually give way to something very different.

From Policy to Communication

The Federal Reserve’s communication strategy evolved over many years rather than changing overnight.

Beginning in 1994, policy decisions were announced immediately following FOMC meetings instead of being inferred from open market operations. Statements became more detailed, meeting minutes were released sooner, and the Federal Reserve eventually began publishing full transcripts after a five-year delay. These changes reflected a growing belief that transparency could improve the effectiveness of monetary policy by helping markets understand the Committee’s objectives and reasoning.¹³

The transformation accelerated after the Global Financial Crisis.

Under Chairman Ben Bernanke, communication itself became an instrument of monetary policy. The Federal Reserve increasingly relied on forward guidance, believing that expectations about future policy could influence borrowing costs, financial conditions and economic activity before interest rates actually changed. Janet Yellen and Jerome Powell largely continued that framework, expanding the use of press conferences, economic projections and other forms of public communication.¹⁴

The result was a fundamental change in the relationship between financial markets and the Federal Reserve.

Investors were no longer reacting solely to policy decisions. They were reacting to speeches, interviews, testimony before Congress and subtle revisions to official statements. A single word added—or removed—from an FOMC statement could move billions of dollars around the world within minutes.

Greater transparency undoubtedly gave investors more information. Whether it reduced uncertainty is less clear. In many respects, it simply shifted investors’ attention from deciphering the Federal Reserve’s actions to interpreting its language.

When One Sentence Moved Markets

Few episodes illustrate that evolution better than the Taper Tantrum of 2013.

On May 22, Chairman Bernanke testified before Congress that, if the economy continued to improve, the Federal Reserve might begin reducing the pace of its bond purchases “in the next few meetings.”¹⁵

It was a modest observation.

The Federal Reserve wasn’t raising interest rates. It wasn’t selling bonds or withdrawing liquidity from the financial system. Bernanke merely suggested that the pace of future bond purchases could eventually slow if economic conditions continued to improve.

Markets reacted immediately.

Treasury yields rose sharply over the following weeks, mortgage rates moved higher and investors around the world quickly repriced financial assets to reflect changing expectations about future monetary policy.¹⁶

The significance of the episode wasn’t the market’s volatility. Markets have always reacted to new information.

The significance was what the market was reacting to.

Investors were responding not to a policy decision, but to a discussion about a policy that had not yet been implemented. Communication had become an integral part of monetary policy itself, and expectations had become almost as influential as actions.

Warsh’s Experiment

Kevin Warsh understands that evolution better than most.

He served on the Federal Reserve Board from 2006 through 2011, participating in policy decisions during the housing collapse, the financial crisis and the unprecedented monetary response that followed. While he supported aggressive action during the crisis, he also expressed concern that the Federal Reserve risked becoming overly dependent on increasingly detailed guidance about its future intentions.¹⁷

That concern appears to be influencing his approach as Chairman.

Warsh’s first FOMC statement was noticeably shorter than those issued in recent years, and he has questioned whether extensive forecasts and highly detailed communications have become more helpful to markets than the discipline of allowing economic data to speak for itself.¹⁸

His argument is both simple and thought-provoking. Forecasts are conditional by nature, but investors often interpret them as commitments. When economic conditions change as they inevitably do, a central bank that has communicated too precisely may find itself constrained by expectations it never intended to create.

Whether Warsh’s approach ultimately succeeds is almost beside the point.

The larger question is whether investors have come to devote too much attention to the Federal Reserve and too little attention to the forces that ultimately create long-term wealth.

Interest Rates Influence. Profits Create.

If you’ve read this far, you might reasonably conclude that this commentary is about Federal Reserve transparency. It isn’t. It’s about perspective.

The Federal Reserve influences one of the most important prices in the economy: the price of money. That influence matters because interest rates affect borrowing costs, investment decisions, asset valuations and the allocation of capital throughout the financial system. Lower rates encourage some behaviors, while higher rates discourage others. Monetary policy changes incentives, and incentives influence behavior throughout the economy.¹⁹

Influence, however, should not be confused with creation. The Federal Reserve does not create wealth. Productive businesses do.

That distinction may seem subtle, but I believe it is one of the most important concepts in investing. Businesses create products, provide services, solve problems, develop new technologies and improve productivity. When they execute well, they earn profits, and those profits rarely remain idle.

They are reinvested in research and development, factories, software, equipment and acquisitions. They are distributed to shareholders through dividends and share repurchases. They are paid to employees as wages and bonuses, to governments as taxes and to lenders as interest.²⁰

Every dollar of corporate profit ultimately goes somewhere. In one form or another, it becomes someone else’s income, financing tomorrow’s investment, consumption or innovation. That process repeats itself millions of times each day and serves as the quiet engine that drives long-term economic growth.²¹

The Federal Reserve influences the environment in which that engine operates. It does not replace the engine.

The Market Doesn’t Wait for the Federal Reserve

One of the more persistent misconceptions in investing is that markets wait for the Federal Reserve before deciding where to go next. History suggests otherwise.

Consider the most recent tightening cycle.

The Federal Reserve delivered its first increase in the federal funds rate on March 16, 2022. By then, however, the S&P 500 had already declined roughly nine percent from its January peak. Investors weren’t reacting to the first rate increase; they were discounting the expectation of many more.²²

The market ultimately reached its low on October 12, 2022, yet the Federal Reserve continued raising interest rates for another nine months. The final increase did not occur until July 26, 2023.²³

That sequence deserves more attention than it usually receives.

The market peaked before the first rate hike and bottomed well before the final one. Neither turning point coincided with the headlines dominating financial news at the time.

Markets were doing what they have always done. They were looking ahead, continually reassessing inflation, economic growth and, perhaps most importantly, the future path of corporate earnings.

That’s because markets don’t simply react to today’s economy. They continuously discount expectations about tomorrow’s.²⁴

The relationship between earnings and stock prices is neither immediate nor perfect. Markets can become detached from fundamentals for surprisingly long periods of time, as they did during the technology bubble when investor enthusiasm drove prices well beyond what underlying profits could support. Eventually, reality reasserted itself.²⁵

The opposite occurred during the Global Financial Crisis. Corporate earnings deteriorated rapidly, and stock prices followed.²⁶

The 2022 correction tells a different story.

Stock prices declined sharply as investors adjusted to a dramatically higher interest-rate environment, but corporate earnings proved considerably more resilient than many had expected. Once investors gained confidence that profitability would hold up despite tighter monetary policy, stocks began recovering even though the Federal Reserve had not yet finished raising rates.²⁷

I spend a great deal of time studying market history, and very few charts have influenced my thinking more than the one below.

That distinction is important.

Higher interest rates compressed valuation multiples, increased borrowing costs and altered investment decisions throughout the economy.

Those effects were both real and significant. The recovery, however, depended on something else. It depended on the market’s growing confidence that America’s businesses would continue earning money.

That’s why I believe interest rates influence the journey, but corporate profits ultimately determine the destination.

The Housing Market Offers Another Lesson

Housing provides another example of how monetary policy influences economic behavior long after the policy itself has changed.

During the pandemic, mortgage rates briefly fell below three percent. Millions of homeowners refinanced, while millions of others purchased homes at financing costs that, in retrospect, proved extraordinarily attractive. The immediate effects were obvious: monthly payments declined, affordability improved, demand increased and home prices rose.²⁸

The longer-term effects were less obvious.

Today, many homeowners are reluctant to sell because doing so would require exchanging a three-percent mortgage for one carrying a substantially higher interest rate. Economists refer to this as the “lock-in effect,” and it has become one of the defining characteristics of today’s housing market. Existing-home inventory remains constrained not because people necessarily want to stay where they are, but because the economics of moving have changed dramatically.²⁹

Few homeowners in 2021 were thinking about lock-in risk.

Yet today’s housing market continues to reflect financing decisions made several years ago. Monetary policy often leaves fingerprints that remain visible long after interest rates themselves have changed.³⁰

That, perhaps more than anything else, illustrates how the Federal Reserve influences the economy. The first-order effects receive the headlines. The second-order effects quietly reshape consumer behavior, capital allocation and economic activity for years.

What Really Drives Long-Term Wealth?

Financial markets naturally devote enormous attention to the Federal Reserve. Monetary policy is visible, immediate and easy to discuss. Corporate profitability is something else entirely. It develops gradually through thousands of decisions made every day by managers allocating capital, employees creating value, entrepreneurs taking risks and consumers deciding where to spend their money.

That process is less dramatic than an FOMC press conference, but it is ultimately more important.

Over long periods of time, successful investing has been less about predicting the next interest-rate decision than identifying businesses capable of generating growing earnings, strong cash flow and attractive returns on capital through a variety of economic environments.³¹

Interest rates matter. They always will.

But they are only one of many variables that influence long-term investment outcomes. Innovation, productivity, sound management, competitive advantage and disciplined capital allocation have ultimately proven far more durable sources of wealth creation.

For that reason, I continue to believe that corporate profits—not Federal Reserve press releases—remain the primary driver of long-term stock prices.³²

How I See It

Clients often ask what I think the Federal Reserve is going to do next. It’s a fair question because interest rates influence nearly every corner of the economy. They affect mortgage rates, business investment, commercial real estate, bond prices and, at least over shorter periods, stock valuations. Ignoring the Federal Reserve would be a mistake. Obsessing over it can be one as well.³³

Early in my career, I devoted more time than I should have to anticipating the Federal Reserve. Like many investors, I evaluated policy statements and speeches and looked for subtle clues about what policymakers might do next. There is value in understanding monetary policy, but experience gradually led me to a different conclusion. The more useful question isn’t what the Federal Reserve is likely to do at its next meeting. It’s what America’s best businesses are likely to earn over the next five or ten years.

Those questions are related, but they are not the same. One focuses on the economic environment; the other focuses on the engine that ultimately drives wealth creation.

The Federal Reserve influences that environment by affecting the cost of capital, the availability of credit and the incentives facing consumers and businesses. Productive businesses, however, create wealth by innovating, investing, competing and allocating capital effectively. When they do those things well, they generate profits that are reinvested, distributed, taxed and spent, supporting tomorrow’s factories, software, medical breakthroughs and jobs.

That process has continued through every Federal Reserve chairman of my career—from Greenspan to Bernanke, Yellen, Powell and now Warsh—and I expect it will continue long after today’s policy debates have faded into history.³⁴

None of this suggests that markets move in straight lines. Valuations can become detached from fundamentals for months or even years, and investor enthusiasm or fear can push prices well above or well below intrinsic value. Interest rates influence those swings, sometimes dramatically. Over longer periods, however, history suggests that businesses capable of consistently growing earnings, generating cash flow and allocating capital wisely have rewarded patient owners.³⁵

When I think back to that afternoon in Dr. Goolsby’s classroom, I don’t remember where the Dow closed. I don’t remember the level of the S&P 500 or the yield on the 10-year Treasury. What I remember is the expression on his face and the realization that something significant had happened, even if I didn’t yet understand its full importance.

Since then, I’ve lived through Black Monday, the savings and loan crisis, the technology bubble, the Global Financial Crisis, COVID, the highest inflation in forty years and one of the fastest interest-rate tightening cycles in modern history. Each episode convinced many investors that the current crisis or the current policy decision would permanently redefine the investment landscape. Some developments did change markets in meaningful ways. Human nature, however, changed very little.

Investors have always been tempted to focus on whatever seems most urgent in the moment. Today, that happens to be the Federal Reserve. Tomorrow it will be something else. The more enduring challenge has never been distinguishing good news from bad news; it has been distinguishing information that changes the long-term value of businesses from information that simply dominates today’s headlines.

That is why I found Kevin Warsh’s comments about Federal Reserve transparency so interesting. Not because I believe they will determine the direction of the stock market over the coming months, but because they remind us how easily our attention can become fixed on the visible rather than the consequential.

The Federal Reserve matters because it influences the environment in which businesses operate. Interest rates matter because they affect the cost of capital. Transparency matters because expectations influence financial markets. Perspective matters most because it determines where we choose to direct our attention.

The investors I’ve admired most over the past four decades were rarely the ones who spent the most time trying to predict the Federal Reserve’s next move. They spent their time studying businesses, evaluating management teams, understanding competitive advantages and thinking carefully about where earnings would come from years into the future. In my experience, that has always been the more reliable path to long-term investment success.

As I look back on nearly four decades in this profession, I’m reminded that headlines are temporary, but the principles that create wealth are remarkably durable. The Federal Reserve will continue to influence markets, just as it always has.

Yet over the long run, it is productive businesses—not central banks—that create wealth. That’s where I believe the real story has always been and that’s how I see it.

Kirk

Endnotes

1. Board of Governors of the Federal Reserve System, Remarks by Chairman Kevin Warsh at His Swearing-In Ceremony, May 2026.

2. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Press, 2007); Board of Governors of the Federal Reserve System, “Biography of Alan Greenspan.”

3. Board of Governors of the Federal Reserve System, “History of FOMC Communications”; Ben S. Bernanke, The Courage to Act (New York: W.W. Norton, 2015).

4. Obituary or official announcement confirming Alan Greenspan’s passing. (Verify this reference before publication.)

5. Dow Jones Industrial Average declined 22.61% on October 19, 1987 (“Black Monday”), the largest one-day percentage decline in its history. See Federal Reserve History, “The Stock Market Crash of 1987”; Mark Carlson, A Brief History of the 1987 Stock Market Crash with a Discussion of the Federal Reserve Response, Finance and Economics Discussion Series 2007-13 (Board of Governors of the Federal Reserve System, 2007).

6. Mark Carlson, A Brief History of the 1987 Stock Market Crash; Federal Reserve History, “The Stock Market Crash of 1987.”

7. Board of Governors of the Federal Reserve System, “Statement by Chairman Alan Greenspan,” October 20, 1987.

8. Mark Carlson, A Brief History of the 1987 Stock Market Crash; Ben S. Bernanke, The Courage to Act, discussion of the Federal Reserve’s role as lender of last resort.

9. Board of Governors of the Federal Reserve System, History of the Federal Open Market Committee; Ben S. Bernanke, The Courage to Act (New York: W.W. Norton, 2015), chapters on Fed communications.

10. Roger Lowenstein, When Genius Failed (New York: Random House, 2000), discussion of Greenspan-era market culture; numerous contemporaneous CNBC reports and Wall Street commentary referring to the “Briefcase Indicator.”

11. Alan Greenspan, The Age of Turbulence: Adventures in a New World (New York: Penguin Press, 2007); Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000).

12. William Greider, Secrets of the Temple (New York: Simon & Schuster, 1987); Alan Blinder, Central Banking in Theory and Practice (MIT Press, 1998).

13. Board of Governors of the Federal Reserve System, “History of FOMC Policy Communications”; Federal Reserve Bank of St. Louis, FOMC Communication Timeline.

14. Ben S. Bernanke, The Courage to Act; Janet L. Yellen, selected speeches (2014–2017); Jerome H. Powell, FOMC press conferences and Federal Reserve communications archive.

15. Ben S. Bernanke, Testimony before the Joint Economic Committee, U.S. Congress, May 22, 2013.

16. Federal Reserve Bank of St. Louis, “The Taper Tantrum”; International Monetary Fund, World Economic Outlook (2013); U.S. Treasury historical yield data.

17. Board of Governors of the Federal Reserve System, Biography of Kevin Warsh; Kevin M. Warsh, speeches and essays on monetary policy (2006–2011).

18. Board of Governors of the Federal Reserve System, FOMC statements and speeches by Chairman Kevin Warsh (2026), together with public remarks discussing the role of forward guidance and central bank communications.

(Washington, DC: Board of Governors, latest edition); Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, 13th ed. (Pearson, 2022).

20. John C. Cochrane, Asset Pricing, revised ed. (Princeton University Press, 2005); Richard A. Brealey, Stewart C. Myers, and Franklin Allen, Principles of Corporate Finance, 14th ed. (McGraw-Hill, 2023).

21. U.S. Bureau of Economic Analysis, National Income and Product Accounts (NIPA); Gregory Mankiw, Macroeconomics, 11th ed. (Worth Publishers, 2023).

22. Board of Governors of the Federal Reserve System, FOMC Statement, March 16, 2022; S&P Dow Jones Indices, historical S&P 500 index levels.

23. Board of Governors of the Federal Reserve System, FOMC Statements, October 2022 through July 26, 2023; S&P Dow Jones Indices; Federal Reserve Bank of St. Louis (FRED), Effective Federal Funds Rate.

24. Eugene F. Fama, “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance 25, no. 2 (1970): 383–417; Burton G. Malkiel, A Random Walk Down Wall Street, 14th ed. (W.W. Norton, 2023).

25. Robert J. Shiller, Irrational Exuberance, 3rd ed. (Princeton University Press, 2015); Jeremy J. Siegel, Stocks for the Long Run, 6th ed. (McGraw-Hill, 2022).

26. Standard & Poor’s, S&P 500 Earnings and Estimate Reports; Robert J. Shiller, online historical earnings database; National Bureau of Economic Research, chronology of the Great Recession.

27. FactSet, Earnings Insight (Q3 and Q4 2022; 2023 editions); S&P Dow Jones Indices; Federal Reserve Board FOMC Statements (2022–2023).

28. Freddie Mac, Primary Mortgage Market Survey (PMMS), 2020–2021; Federal Housing Finance Agency (FHFA), Mortgage Market Activity Reports; National Association of Realtors (NAR), Existing Home Sales.

29. Federal Housing Finance Agency, The Lock-In Effect of Low Mortgage Rates (working paper, 2023); Federal Reserve Bank of Philadelphia, “Mortgage Rate Lock-In and Housing Mobility”; National Bureau of Economic Research (NBER), research on mortgage lock-in and housing supply.

30. Federal Reserve Bank of Kansas City, Economic Review: housing market effects of monetary policy; Federal Reserve Bank of New York, research on housing finance and monetary transmission.

31. Jeremy J. Siegel, Stocks for the Long Run, 6th ed. (New York: McGraw-Hill, 2022); John C. Bogle, The Little Book of Common Sense Investing, updated ed. (Hoboken, NJ: Wiley, 2017); Warren E. Buffett, Berkshire Hathaway Shareholder Letters (selected years).

32. Robert J. Shiller, Irrational Exuberance, 3rd ed. (Princeton University Press, 2015); Eugene F. Fama and Kenneth R. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance 47, no. 2 (1992); Standard & Poor’s, historical S&P 500 earnings and index data.

33. Board of Governors of the Federal Reserve System, The Fed Explained: What the Central Bank Does (Washington, DC: Board of Governors, latest edition); Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, 13th ed. (Pearson, 2022).

34. Board of Governors of the Federal Reserve System, biographies of Alan Greenspan, Ben S. Bernanke, Janet L. Yellen, Jerome H. Powell and Kevin Warsh; Federal Reserve historical archive.

35. Jeremy J. Siegel, Stocks for the Long Run, 6th ed. (New York: McGraw-Hill, 2022); Warren E. Buffett, Berkshire Hathaway Inc., Annual Shareholder Letters (selected years); Robert G. Hagstrom, The Warren Buffett Way, 4th ed. (Wiley, 2013).

February 2, 2026 by Steve Tomisek, CFP®

By: Steve Tomisek, CFP® | Chief Investment Officer

For the sixth time in the last seven years, the stock market, as measured by the S&P 500, delivered double-digit returns. In 2025, the S&P 500 gained 17.88% including dividends. This remarkable streak, interrupted only by the 2022 inflation-driven downturn, has left many investors in a positive financial position.

It’s often said that the anticipation of something is greater than the thing itself. On the one hand, investors always hope for strong returns like these, which are unequivocally positive for portfolios and financial goals.

This is especially true as market performance has broadened beyond artificial intelligence-related stocks, international markets have rebounded, and fixed income has supported portfolios.

Importantly, the Russell 2000 is up 5.31% year-to-date versus 1.37% for the S&P 500. Both indexes recently reached all-time highs. Over the past three years, the Russell 2000 has lagged the S&P 500 by 8% per annum and a more modest 4.5% per annum over the last 10 years, which is nonetheless a significant amount of underperformance on an annual basis for a ten-year period.

Many are expecting small caps to finally outperform large caps in 2026. So far, that seems to be the case.

Not to be left out, non-US stocks as measured by the MSCI ACWI Ex USA Index are up 5.99% and just off a recent all-time high driven in part, by the falling US dollar.

This broadening in the market beyond the Mag 7 signals good things for the remainder of the year and is to be expected in our view. It’s a reflection of the broadening of corporate profits outside of the Mag 7 and includes small-caps, developed non-US markets and emerging markets.

The Atlanta Fed’s GDPNow forecast is signaling Q4 2025 GDP growth of 4.2%, double the long-term trend of 2%. https://www.atlantafed.org.

Finally, the close of January allows us to look back at three key technical indicators – the Santa Claus Rally (SCR), the First Five Days (FFD) of January and the January Barometer (JB) which measures performance for the full month of January – for clues for the remainder of the year.

Taken together, these three indicators are called the January Indicator Trifecta. They are published by The Stock Trader’s Almanac. https://www.stocktradersalmanac.com/

When these indicators are positive, it generally means that solid returns are ahead for the remainder of the year. For the most recent reading, the Santa Claus Rally failed to materialize but both the First Five Days and the January Barometer were positive for a two out of three-batting average.

Since 1949, this combination has existed on six (6) times. While this is a small sample set, there was only one down year, 1994, when the S&P 500 lost 1.5%. Across all six (6), the median gain for the remaining 11 months was 13.3% and the median full year return was 26.4%. a

Up Januarys are followed by up years, 89.1% of the time (41/46 years) with an average S&P 500 gain of 16.9%. The SCR and FFD were both negative in 2024 but the JB was positive, as was the S&P 500 which gained 23.3%. The SCR was down in 2025 while FFD and JB were up. Despite the negative SCR reading, the S&P was up 16.4% last year. Wil this year reveal the same. We’ll see.

On the other hand, once these strong returns are realized, investors tend to grow nervous, especially with major indices near all-time highs and valuations approaching historic dot-com peaks.

In 2025, there were turning points across many of the issues investors have faced over the past few years. Inflation, which is still affecting households, has stabilized around 3%. Tariffs, while high by historical standards and the main driver of stock market swings in 2025, have not resulted in the economic disruption many feared. The Federal Reserve has continued cutting rates, with 2-3 more cuts expected in 2026, and the economy has grown at a healthy pace.

When we zoom out, perhaps the most important lesson to take into the new year is that what investors fear the most often doesn’t come to pass. The recession many have feared since 2022 did not occur. History suggests that for every genuine market disruption, like the 2020 pandemic or 2008 financial crisis, there are dozens of feared “black swans” – rare, unanticipated events – that never materialize. The challenge for long-term investors isn’t predicting which events will matter, but maintaining perspective and discipline across all market conditions.

As we look ahead to the remainder of 2026, the investment landscape presents both opportunities and challenges.

Topics likely to be in the headlines include the upcoming midterm election, a changing of the guard at the Federal Reserve, the future of AI, growing concerns around loans, the path of the U.S. dollar, and geopolitical unrest.

What matters most isn’t whether investors can forecast each twist and turn, but whether their portfolio is positioned to weather uncertainty while capturing long-term growth.

Here are seven key themes that can help guide how investors think about the year ahead.

1. Many asset classes are supporting portfolios into 2026

Importantly for investors, many asset classes are contributing to portfolio returns at the start of 2026. This is in contrast to much of the past decade when U.S. stocks outperformed the rest of the world. In 2025, international stocks outpaced U.S. markets, with developed market stocks (MSCI EAFE) and emerging market stocks (MSCI EM) each gaining over 30% in U.S. dollar terms. This has been driven by two key factors: improving growth expectations in many economies and the weakening dollar, which boosts returns for U.S.-based investors.

Fixed income is also playing an important stabilizing role in portfolios. The Bloomberg U.S. Aggregate Bond Index has gained over 8% last year as the Federal Reserve continued cutting interest rates and inflation stabilizes. Higher-quality bonds have been serving their purpose by providing income and offsetting stock market volatility during periods of market uncertainty.

In 2026, this underscores the importance of balance and diversification. While it may be tempting to make sudden portfolio changes based on headlines, investors who stay on track with their financial plans are likely to be rewarded.

2. Market valuations are approaching dot-com levels

One effect of the strong returns of the past several years is that stock market valuations continue to rise. The S&P 500 currently trades at a price-to-earnings ratio of 22.5x, approaching the all-time high of 24.5x reached during the dot-com bubble. By definition, this means that investors are paying more for each dollar of future earnings than in recent years.

Investors typically worry about valuations when they become disconnected from the underlying fundamentals. For example, the dot-com bubble experienced historic valuation levels that far outpaced revenues and earnings, as investors rewarded any company related to the “new economy.” While valuations are expensive today due to enthusiasm around AI and ongoing economic growth, corporate fundamentals remain strong. Earnings have grown at a healthy pace, with the expectation they could continue to do so according to consensus estimates data by LSEG.

So, it’s important to recognize what high valuations do and do not tell us. Valuations don’t necessarily predict immediate market declines since markets can remain expensive for extended periods. While some investors worry about an “AI bubble,” the reality is that not all bubbles pop. Instead, some deflate slowly as the fundamentals catch up. This is one difference between the dot-com bust of the late 1990s and early 2000s and the growth of cloud computing over the past decade.

However, high valuations do suggest that returns could be more modest going forward, since markets are already accounting for future growth. This can also increase the market’s sensitivity to disappointments. Investors often say that markets like these are “priced for perfection,” so even minor misses on earnings or economic data can spur volatility. This means that being selective and maintaining balance across different parts of the market – including asset classes, sectors, sizes, styles, and more – will only grow in importance.

3. AI is driving economic growth and returns

Perhaps no single trend has captured investor attention more than AI. Capital expenditures on AI infrastructure reached extraordinary levels in 2025, with the total investment easily reaching trillions of dollars. This includes building new data centers, purchasing equipment such as GPUs, and hiring AI researchers.

Some of these investments involve deals that seem circular. For example, Nvidia invested up to $100 billion in OpenAI, which in turn is buying millions of Nvidia’s chips. These interconnected relationships have raised concerns about whether the AI ecosystem can sustain itself if enthusiasm wanes.

These trends reflect the reality that AI requires infrastructure that few companies can afford alone. The question is whether the technology will ultimately generate enough value to justify the enormous spending. As it stands, AI investment is currently a large contributor to the overall economy.

Surveys suggest that businesses are increasingly adopting AI into their workflows. According to the Census Bureau’s Business Trend and Outlook Survey, the share of businesses reporting use of AI more than doubled from 4% in September 2023 to 10% in September 2025. The share of businesses that anticipate using AI over the next six months rose at a similar rate, from 6% to 14% over the same period.¹ While these numbers have jumped, they still have significant room for growth.

For investors, AI presents both upside potential and downside risk. The Magnificent 7 technology companies continue to lead markets higher, driven by infrastructure investments and growing adoption of AI tools. However, this concentration creates vulnerability. These companies now represent about one-third of the S&P 500, meaning most investors have substantial exposure, whether they realize it or not.

The challenge isn’t whether AI will transform the economy – it clearly will. Rather, it’s whether current valuations adequately reflect realistic timelines for returns on these massive investments. History from the railroad boom of the 1860s to the dot-com era of the 1990s shows that transformative technologies often follow similar patterns: initial skepticism, rapid adoption, market enthusiasm, and eventual integration into the broader economy.

The key lesson is that markets often overestimate the speed at which profits can be generated. The reality is that most investors likely have exposure to AI stocks whether directly or through major indices, so being aware of this concentration, and staying true to an appropriate asset allocation that fits with long-term goals, will be needed in the coming year.

4. Economic growth is slowing but remains positive

Economic growth trends have decelerated but remain stronger than many had feared. U.S. GDP experienced a slightly negative dip in the first quarter of 2025, but this rebounded quickly as tariff uncertainty faded. The 3.8% growth rate in the second quarter not only exceeded expectations, but is one of the strongest quarterly growth rates in years.

When it comes to global GDP, the International Monetary Fund projects that growth could ease just slightly from 3.2% in 2024 to 3.1% in 2026. Advanced economies are projected to grow around 1.5%, while emerging markets are projected to maintain growth above 4%.²

Although positive in aggregate, economic growth has been uneven across different income groups and sectors. This concept is often referred to as a “two-speed” or “K-shaped” economy, since some experience growth while others struggle.

In today’s economy, this divergence is primarily driven by technology trends, since those positioned to benefit from the growth of AI could experience greater job prospects than those in traditional industries. However, it’s not just about AI, since consumer debt, auto loan delinquencies, and other financial challenges can affect whether individuals benefit from economic growth.

When it comes to long-term economic growth, perhaps the most important question is whether productivity will rise due to recent technological advances. Productivity measures how much, either in terms of quality or quantity, a worker can produce in a given amount of time. Historically, better equipment, training, and education have driven greater productivity, which is what drives real economic growth.

As the chart above shows, productivity growth averaged only 1.2% per year during the 2010s. The hope of AI and new technologies is a boost to worker output. However, this often takes longer than expected, and won’t necessarily benefit everyone equally. For investors, the promise of greater productivity is that profit margins can improve, supporting the broader economy and investor portfolios.

5. The impact of tariffs remains uncertain

While tariffs were the primary driver of stock market volatility in 2025, their economic effects have been mixed. In fact, one of the ongoing puzzles is how little immediate impact tariffs have had on inflation and growth. Despite tariff costs increasing ten times their average level compared to prior years, measures such as the Consumer Price Index have ticked up only slightly.

There are several possible explanations as to why tariffs have not had their anticipated effect. First, many of the announced tariffs were quickly paused or scaled back. Second, many companies absorbed the initial cost of tariffs by keeping their prices steady and importing goods ahead of tariff announcements. Finally, strong consumer spending, fiscal stimulus, and healthy growth in AI-related sectors helped offset any negative impact on overall growth. It’s also worth noting that the Supreme Court may rule in 2026 on the legality of the economic justification used for these tariffs.

For long-term investors, these recent developments, along with the first round of trade negotiations in 2018, highlight the fact that tariffs are part of the government’s playbook. Rather than reacting to these tariffs as a shift in the world order, they instead represent tools for the administration to support broader policy goals. While tariffs aren’t going away, their impact on day-to-day market activity could diminish.

6. Midterm election and government debt will be at the forefront in 2026

In addition to changes in trade policy, 2025 also had a historic 43-day government shutdown and ongoing concerns over the size of the budget deficit. At the same time, the recently passed One Big Beautiful Bill Act (OBBBA) tax legislation has created more clarity for investors and taxpayers.

The new year will begin with more uncertainty in Washington as the short-term funding bill expires at the end of January. This means there could be another wave of negotiations that could result in another government shutdown. Then, some investors expect households and businesses to benefit from greater tax refunds due to provisions in the OBBBA such as full expensing of research and development.

Looking further ahead, investors will likely shift their attention to the midterm election and what it could mean for tariffs, regulation, government spending, and more. The chart above shows that midterm elections have historically experienced healthy returns, averaging 8.6% since 1933, even if they are slightly lower than non-election and presidential election years.

Still, the biggest concern for many investors is the ever-growing national debt. The truth is that the historically high national debt, which is hovering around 120% of GDP for total debt, or over $36 trillion, is unlikely to be solved any time soon. In fact, it’s estimated that the OBBBA could increase the national debt by over $4 trillion in the next decade. As it stands, the national debt amounts to over $106,000 per American.

For long-term investors, it’s important to recognize what we can and cannot control. For example, the national debt has been a challenge for decades, yet investing based on these concerns would have resulted in the wrong portfolio positioning. While the sustainability of the U.S. federal debt may have implications for economic growth and interest rates, history shows that this should not be the primary driver of portfolios.

Instead, what investors can control in the short run is understanding the key changes to tax legislation and how it impacts long-term planning. These include the fact that lower tax rates from the Tax Cuts and Jobs Act are now permanent, estate tax exemption levels will remain higher, SALT deduction caps have risen, and many other provisions. It’s the perfect time to review your tax strategies to ensure you take full advantage of these new rules.

7. The Federal Reserve will support the economy

The Fed resumed cutting rates in September after pausing earlier in the year. As we enter 2026, the path of monetary policy could become less certain. This is because the risk of runaway inflation may no longer be the primary concern as a weaker job market has grown in importance. This requires tweaks to policy rates rather than dramatic shifts, such as those seen in 2022.

An additional complication is that Fed Chair Jerome Powell’s term will end on May 15, 2026, paving the way for new leadership by the recently named Kevin Warsh, who is expected favor additional rate cuts to support the administration’s economic agenda of lower interest rates.

The chart above shows that the economy has performed well across Fed Chairs appointed by both parties. It’s important to note that the Fed only controls the “short end” of the yield curve, that is, interest rates that are closely tied to the federal funds rate. Long-term interest rates depend on many other factors, such as economic growth, inflation, and productivity. So, rather than follow the Fed’s every move and parse every statement, investors should continue to focus on these longer-term trends to understand the impact on interest rates and bonds.

Maintaining perspective in 2026

As think about the remained of the year, investors face a familiar challenge: balancing concerns with the reality that markets have consistently rewarded patient, disciplined investors over time. The list of worries is ever-present, yet history suggests that for every crisis that disrupts markets, many more feared events have failed to materialize. 2025 was certainly a year where the markets climbed a wall of worry. Will the hold true for 2026? We’ll see.

What separates successful long-term investors thought, isn’t the ability to predict which concerns matter most, but the ability to stay balanced throughout all phases of the market cycle.

The bottom line? Markets have delivered strong returns, but elevated valuations and slower global growth suggest more modest expectations for 2026. Rather than attempting to time the market based on any single concern, investors should focus on maintaining balanced portfolios positioned for various outcomes.

References

1. https://www.census.gov/hfp/btos/data_downloads

2. https://www.imf.org/en/publications/weo/issues/2025/10/14/world-economic-outlook-october-2025

This newsletter is a publication of Kirk Capital Advisors, LLC. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. A professional advisor should be consulted before any investment decisions are made. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for your investment portfolio. All investment strategies have the potential for profit or loss. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. Kirk Capital Advisors, LLC is registered as an investment advisor and only transacts business in states where it is properly registered or excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability. ©2025 Kirk Capital Advisors, LLC.

Copyright (c) 2026 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company’s stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security–including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

July 2, 2025 by Steve Tomisek, CFP®

By: W. Kirk Taylor, CFP® | Chief Investment Officer

On the morning of April 7^th, with the stock market reeling, I issued a special message to clients, noting that the pace at which the market had fallen had not been seen since the Covid-19 panic.

I quoted Vanguard Founder John C. Bogle who famously said that “Time is your friend; impulse is your enemy and reminded our clients that “Periods of panic can present opportunities for disciplined, long-term investors”.

On that day, the S&P 500 reached an intraday low of 4,835. At the close of the second quarter, the S&P 500 closed at 6,205, with a gain of 1,360 points or 28%. Traders on Wall St., call that a monster truck rally!

Looking back, I observe that the second quarter of 2025 showcased both the resilience of financial markets and their sensitivity to policy uncertainty. From the White House’s tariff announcements in April to escalating tensions between Israel and Iran in June, investors faced many challenges. Yet, the stock market went on to stage one of the fastest rebounds in history and finished the quarter at new all-time highs.

Overall, it was a strong quarter for stocks, while bonds also delivered positive outcomes. For long-term investors, these events are a reminder that while headlines can drive short-term swings, maintaining perspective and staying focused on fundamental trends remains the key to achieving financial goals.

Key Market and Economic Drivers in Q2

The S&P 500 and the Nasdaq both ended the quarter at record highs, gaining 10.6% and 17.7% over the three months, respectively. The Dow Jones Industrial Average rose 5.0% and is 2% below its record level.
The Bloomberg U.S. Aggregate Bond Index gained 1.2% in the second quarter. The 10-year Treasury yield ended the quarter at 4.2% after reaching as high as 4.6% in May.
Developed market international stocks (MSCI EAFE) rose 10.6% and emerging market stocks (MSCI EM) increased 11.0% in the quarter.
Gold rallied to a new record level of $3,431 per ounce, before settling at $3,308 to end the quarter.
Bitcoin reached a high of $111,092 in May and hovered around $107,000 at the end of June.
The U.S. Dollar Index continued to fall over the quarter, ending the quarter at 96.88. It started the year at 108.49.
The Consumer Price Index rose 2.4% year-over-year in May, while core inflation, which excludes food and energy, came in at 2.8%.
The University of Michigan Consumer Sentiment Index improved in May to 60.7, its first increase in six months. Consumers expect an inflation rate of 5.0% over the next year, down from 6.6% in the previous survey.
At its June meeting, the Federal Reserve kept rates unchanged within a range of 4.25 to 4.5%.

Markets rebounded to new all-time highs

Despite significant volatility, the stock market recovered quickly once the worst-case scenarios for tariffs and geopolitical tensions did not materialize. The quarter began with heightened uncertainty following the announcement of new tariffs on April 2, which were more far-reaching than many investors had anticipated.

However, as the administration engaged in negotiations and reached preliminary trade agreements with several partners, market sentiment improved. The Middle East conflict created a similar outcome, although markets were broadly resilient and went on to new highs after the ceasefire between Israel and Iran was announced.

The equity market rebound was widespread, with many sectors, styles, and regions delivering positive outcomes. International stocks continue to lead the way in 2025, especially with the dollar weakening. Small cap stocks have lagged other parts of the market due to their greater sensitivity to tariffs and domestic trends, and the Russell 2000 index is still down -2.5% this year.

At a sector level within the S&P 500, Information Technology stocks experienced a strong recovery and contributed toward the new market highs. Many other sectors are supporting markets too, including Industrials which are now up 11.4% on the year, Communications which have gained 10.2%, and Financials up 7.5%. On the other end, Healthcare and Energy saw weakness.

Bond markets are also quietly contributing to portfolio outcomes, with relatively strong yields and falling credit spreads contributing in the quarter. Treasury securities and corporate bonds also experienced volatility during the tariff-induced drawdown, although the quarter ended in positive territory.

The dollar continued to weaken

The U.S. dollar weakened through the second quarter despite tariff pressures. While a weaker dollar can be negative for consumers, it can be positive for U.S. businesses and exporters, since it becomes cheaper for those using foreign currencies to buy our goods. While the dollar has declined this year and is near the low end of its range since 2022, its value is still high compared to the past decade.

When it comes to monetary policy, the Federal Reserve held interest rates steady at 4.25% to 4.5% throughout the quarter, reflecting a measured approach to monetary policy in an evolving economic environment. Fed Chair Jerome Powell emphasized the Fed’s focus on price stability even as other factors complicate the economic outlook.

Specifically, the Fed’s updated economic projections reveal the challenges policymakers face. Officials now expect inflation to reach 3% in 2025 before moderating to 2.1% by 2027, marking an upward revision from earlier forecasts. They also expect real GDP growth to slow this year to 1.4%, a downgrade from a 1.7% projection in March. These adjustments reflect concerns that tariffs could spur inflation and slow growth.

The conflict between Israel and Iran added another layer of complexity to an already challenging environment. Israeli strikes on Iranian nuclear facilities and military targets beginning June 13 created immediate concerns about regional stability and potential escalation. However, the two countries agreed to a ceasefire after 12 days of fighting.

Bonds helped to provide portfolio balance

While the stock market has ended the quarter at new all-time highs, the decline and rebound was challenging for many investors. Fortunately, bonds helped to support balanced portfolios during the quarter. High yield, corporate, and Treasury bonds all provided balance and are positive year-to-date. Interest rates have remained higher than many had expected, and short-lived concerns in April about a flight from U.S. Treasury securities did not occur.

Budget discussions in Washington have brought renewed attention to America’s fiscal trajectory. The national debt now exceeds $36 trillion, or approximately $106,000 per American. According to the Congressional Budget Office, the latest budget proposal could add an estimated $3.3 trillion in deficits over the next decade. While the proposal includes spending reductions, these are outweighed by tax cuts and spending increases elsewhere.

Moody’s downgraded the U.S. credit rating in May, citing concerns about successive administrations and Congress failing to address “large annual fiscal deficits and growing interest costs.” This echoes similar challenges raised during previous budget standoffs in 2011, 2013, and from 2018 to 2019. However, in each instance, agreements were eventually reached, markets stabilized, and economic growth resumed.

For long-term investors, these fiscal debates underscore the importance of maintaining diversified portfolios that can weather various policy outcomes. While deficit levels deserve attention, history suggests that the U.S. economy’s fundamental strengths and adaptability remain intact.

The bottom line? The second quarter demonstrated both market volatility and resilience as investors navigated policy changes and global tensions. For investors, maintaining perspective and focusing on asset allocation strategies remain the most effective way to achieve long-term goals.

Copyright (c) 2025 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company’s stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security–including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

April 1, 2025 by Steve Tomisek, CFP®

By: W. Kirk Taylor, CFP®

With the stock market back near correction territory due to tariff concerns, some investors may feel as if the market is stuck in a “Groundhog Day” loop. Fears of a trade war have kept markets choppy all year, with the technology sector leading the downturn. After months of uncertainty, some investors may feel as if financial markets will never stabilize. How can long-term investors maintain perspective in this challenging environment?

Like the seasons, booms and busts are natural parts of the market cycle. Although the winter months may be unpleasant and can seem endless, they eventually give way to warmer weather. So too have market pullbacks historically stabilized, paving the way for expansions and bull markets. While worries over an escalating trade war make this market correction unique, recent history suggests that it too could eventually turn around once there is greater clarity.

Market pullbacks are normal, and recoveries often occur when they’re least expected

The S&P 500 is near correction territory, defined as a decline of 10% from the prior peak, and the Nasdaq has been in a correction for nearly a month.
¹
Economic uncertainty has led to many sizable market swings over the past several weeks, including days where major stock market indices decline by one or two percentage points.

It’s often said that markets take the stairs up and the elevator down. This is because market recoveries tend to be slow moving and compound over time, whereas the events that create short-term fear tend to be sudden, just as they have been this year. At the same time, history shows that even new market lows tend to be higher than previous peaks. In other words, markets often take the stairs up several floors before riding the elevator down one or two levels in a correction.

This is relevant in today’s market since the correction in the S&P 500 is relative to its recent February all-time high.

When zooming out, the stock market is only back to where it was last September. So, while unpleasant, it’s important to keep these recent moves in perspective.

As the chart above shows, stock market corrections occur on a regular basis and average 14.3% since World War II. Despite this, major indices have historically recovered in a few months with rebounds often occurring when they’re least expected. Recent examples include the stock market rebounds in mid-2020 during the pandemic, in late 2022 following the tech-led bear market, in early 2023 after the banking crisis, and throughout countless other examples.

Trying to time the market is often counterproductive

Instinctively, the nature of up and down periods can lead some investors to try to time the market, seeking safety during down days. Trying to time upswings often backfires, since investors often miss the early parts of a recovery. Similarly, waiting until markets are already recovering can hurt long-run returns as well.

While all investors would like to think they can avoid the worst market days, the truth is that getting this right is difficult, if not impossible. Even in the case when investors can avoid all extreme days, the final outcome is only marginally better than simply staying invested through downturns. This assumes perfect foresight – in reality, investors are often reacting to events that have already occurred. So, while the past is no guarantee of the future, this is a reminder for investors to stay focused on the long run and not get caught up in short-term market movements.

Tariffs and technology stocks

Investors have grappled with the wide-range of potential outcomes from the administration’s potential use of tariffs. In many cases, these tariffs are used as a negotiating tactic to bolster positions on other issues such as immigration. In the short run, the fear of higher prices has already impacted consumer sentiment and inflation concerns.

While there is significant uncertainty today as to how tariffs will take shape in the coming days, the true economic impact of trade unfolds over a longer timeframe. It takes many quarters to fully understand how companies will adjust their sourcing strategies, whether costs are absorbed or passed on to consumers, and how trading partners respond with potential retaliatory measures. Investors should be careful to not extrapolate today’s news headlines indefinitely into the future.

In the meantime, the technology stocks, which led markets higher in the last several years have led the market lower recently, as shown in the accompanying chart. It’s important to view these recent moves in the context of the full cycle. Even after the recent double-digit declines, the Magnificent 7 stocks having risen significantly since January 2021 on the heels of earnings that are significantly higher than the broader market.

At the same time, many other sectors have performed better over the past several months including Energy, Healthcare, Utilities, Financials, and others.

Over the past year, eight of the eleven S&P 500 sectors are in positive territory, despite recent swings. This underscores the importance of investing across many parts of the market, in balanced portfolios that are aligned with financial plans.

The bottom line? Market volatility has increased on tariff news, with technology stocks experiencing a challenging period. There have been difficult market days recently, but history shows that focusing on the long run is still the best way to achieve financial goals.

¹
S&P 500 declined 9.2% between February 19, 2025 and March 28, 2025. The Nasdaq fell 14.1%, between December 16, 2024 and March 28, 2025

February 27, 2025 by Steve Tomisek, CFP®

By: W. Kirk Taylor, CFP^®

Recent market swings have highlighted a gap between how investors feel and how markets have performed. As the famous Warren Buffett quote suggests, it has often been wise to be “fearful when others are greedy and greedy when others are fearful.” While this can seem counterintuitive when there are many economic and political concerns weighing on the market, having the discipline to stay invested has historically been the reason investors are rewarded in the long run.

Please click the link below to read more…

CLICK HERE TO READ THIS WEEK’S COMMENTARY!

February 25, 2025 by Steve Tomisek, CFP®

By: W. Kirk Taylor, CFP®

Investors have faced several market concerns early in the year around tech stocks, interest rates, and government policy. Among these factors, it’s no surprise that trade policy has emerged as particularly significant for markets. President Trump has launched various trade measures, including tariffs on Canada, Mexico, China, and the European Union. How should investors react to these news headlines?

Please click the link below to read more…

CLICK HERE TO READ THIS WEEK’S COMMENTARY!

February 4, 2025 by Steve Tomisek, CFP®

By: Mark D. Troutman, PhD, CFP ®

Many people attribute the sage wisdom of “…predictions are hard, especially about the future…” to baseball legend Yogi Berra. In fact, the quote is attributed to physicist Niels Bohr, who advised listeners to be humble in forecasting given uncertainties and unknowns. The past four years have driven that lesson home to me personally.

So, in the spirit of humility, let’s review the year that was and look forward to the year that might be. In summary, 2025 opens with an economy operating at full capacity, yet with distinct risks. For all the reports on improved performance, there was a clear message. Tame inflation, and let Americans get back to business.

The US economy continues to be the envy of the world. The coming year also signals policy change. In short, this economist believes the outlook is bright, with risks to inflation and interest rates. So – remain optimistic and attentive to risk.

Output. 2024 opened with predictions for modest growth and the possibility of recession in the second half of the year. Despite some growth and inflation scares during the year, GDP expanded to a real 2.7% through 3Q24. 2024 finished strong, with modest slowing and promise of continued expansion into 2025.

This expansion, and the broader recovery since 2020 set the US apart from the rest of the world. US consumers proved more resilient than many believed possible as stimulus funds spent out and interest rates continued to rise. The consumer, the final driver of real US GDP growth, remained strong.

Employment (Unemployment). Labor markets remained strong in 2024 with unemployment below historical rates. Employment expanded, though less broadly than many labor market economists would prefer. Unemployment held firm at 4.1% – generally regarded as full employment. Labor markets became less tight but did not fall into recession. Fears that low unemployment would feed inflation did not materialize. Immigration, a contentious issue, stabilized labor markets and allowed employment to expand while containing inflation.

Wage growth – a key driver of inflation in a service based economy – has been moderate at 3.9% This rate is consistent with increases in productivity and inflation. Most important, these levels sustain incomes which in turn support consumption.

Inflation has been the great pain we all have experienced since 2021. Price levels are the highest in history, and we pay more for everything that we use in everyday life. While inflation has slowed in recent years, it has stalled at levels above the desired target of two percent. Supply chains have largely healed, and deficits remain high at over six percent of GDP in a full employment economy.

The latest consumer sentiment report showed a sharp jump – from 2.8% last month to 3.3%. These are the highest expectations of inflation since 2008. Informal comments in the inflation survey indicated a “…buy it before the price goes up” mentality. Consumers represent 70% of US economic activity, so their expectations drive the future. Interest rates, in turn, follow inflation. We remain vigilant for signs of an upturn in inflation.

Interest Rates. The Federal Reserve lowered its policy rate by a full percentage point in 2024. Markets expected four additional cuts in 2025 with short term rates settling in the 3.5% range. The stall in inflation has reduced expectations from four to two cuts. The Chicago Mercantile Exchange (CME) has projected a maximum of two cuts this year. Longer rates have risen on inflation fears and concerns about persistent, large, and potentially growing federal deficits. We expect interest rates to remain elevated and the risks of an upturn are real.

Corporate profits. The ultimate driver of stock prices, have been a bright spot in 2024 rising 6.1% as of 3Q24. Expect profits to hold in 2025 if the conditions of 2024 continue. A JP Morgan survey of its business clients released on 7 January indicated that 75% were confident that revenues would continue to increase in 2025. Stock valuations, while high, have support from profits for now.

Overview for 2025. On January 20th, a new team assumed leadership of the executive branch, tasked by the US Constitution, Article II Section 8 to “…take Care that the Laws be faithfully executed…” The Republican majority in the House and Senate, sworn in on January 3^rd will make the laws. An executive branch and congress of the same party (Republican) indicates that policies to extend tax cuts, employ tariffs and reduce regulations will be priorities. The early actions and demonstrable energy of the new administration confirm this view.

While the policy intentions of the new team are evident, the final outcomes will take time to clarify. Slim congressional majorities will slow the legislative process. Bond markets have signaled that high deficits are a concern. This will prompt examination of fiscal policy. We look to the next six months for a clear indication of what is likely in the realm of policy. In increasing likelihood:

Tariffs. The President has stated a preference to use tariffs and has wide latitude to impose them. We will publish commentary in the coming weeks that months that provides more detail – in plain English. Tariffs are taxes on goods, which raise the risk of inflation. The Executive Order signed on 20 January directed an examination of trade patterns, presumably to refine tariff policy. Early actions indicate a desire to use tariffs to create negotiating leverage in other areas such as immigration policy. Trade is a smaller share of the US economy compared to our many trading partners. So, while inflationary, the actual impact of tariffs will depend on target products and trading partners.
Immigration. The actual number of undocumented immigrants is unknown, but estimates place the number between ten and twelve million. An immediate removal of the undocumented population would further reduce the 167.5M strong US labor force and tighten labor markets. As with tariffs, the early actions appear forceful but limited to deportations of individuals with existing deportation orders. While a reduction in the labor force risks higher inflation, more targeted actions would reduce inflation risk.
Tax reform. The conversion of 2017 tax reforms to permanent status will be a high priority for the incoming administration and Congress. As we presented on our October event, these decisions will not become clear until well into 2025, as any adjustments require congressional action. This means that 2025 is a year for tax planning.
Regulation. The incoming administration is committed to reducing regulations. Brookings Institution published a study in 2022 of the deregulatory impacts of the first Trump administration. The results confirmed a net reduction in regulations but were unable to clearly determine impact. The results favor pro-growth conditions. The overall impact on the economy is less clear, but positive.
Inflation. Two major initiatives – tariffs and immigration restrictions – have inflationary effects. Tax reform that results in higher deficits also risks inflation. An outright win would be deficit reduction – but narrow congressional majorities and large deficits make this outcome unlikely in the near term. The Federal Reserve has signaled a commitment to return inflation to a two percent benchmark. Do not expect this to happen until 2026, unless there is a recession in 2025 – and none of us is wishing for that.
Interest Rates. The price of falling inflation has been higher interest rates. We advised our clients to expect “higher for longer” in 2021 and 2022, and our predictions have proved true. Higher inflation implies that rates will remain higher for longer. Higher productivity and falling deficits could result in more favorable conditions. The outcome of policy changes outlined above will make the path of interest rates clearer over the next year. Over the next few months, expect higher rates overall.

Final thoughts. Productivity has improved in the last few years, and the rapid developments in artificial intelligence and other technologies promise higher productivity still. As the introduction information technology revolution showed in the 1990s, productivity improvements can be hard to spot and take a long time to materialize. Free markets and efficient government are powerful combinations that delivered results in the past. We expect this to hold in the future.

Geopolitical tensions and threats of trade wars carry the risk of supply chain disruptions and reignited inflation. Pragmatism and wisdom have guided us through past tensions. Pray that “…the better angels of our nature…” will prevail in times of tension that seem to be growing.

Kirk and I remain optimistic and vigilant. The US economy remains vibrant and a driver of the world economy. We expect the next year to be turbulent and full of change. Output will expand with short term risks of disruption. Inflation will fall in the absence of any policy errors outlined earlier. The fall will be stubborn, slow and will last into 2026. Interest rates will remain higher for longer and will not fall further before the second half of 2025. US industry will remain inventive and innovative. The incoming administration has promised a new age of prosperity. We will see if they deliver for the American people.

January 28, 2025 by Steve Tomisek, CFP®

By: W. Kirk Taylor, CFP^®

The stock market has been going through a rough patch lately as investors worry about several things: interest rates, whether stocks are too expensive, and how well the economy is doing. Since December 6 last year, the main stock market index (S&P 500) has fallen 4.3%, while the interest rate on 10-year government bonds has gone up from 4.15% to 4.76%.

This drop in stock prices makes sense as investors process new information about the economy. A recent report showed more jobs were created than expected in December. This suggests the economy is doing well and might not need help from the Federal Reserve (“the Fed”) in the form of lower interest rates. Right now, investors think the Fed might only lower rates once in 2025, possibly for the last time in this cycle. But these predictions can change quickly, just like they did throughout 2024.

Please click the link below to read more…

CLICK HERE TO READ THIS WEEK’S COMMENTARY!

November 20, 2024 by Steve Tomisek, CFP®

By: W. Kirk Taylor, CFP®

While the political world will focus on the election for some time, financial markets have already shifted their attention to the next administration’s policies, Federal Reserve rate cuts, and the underlying economy. Putting politics aside, chances are that the next administration will inherit strong economic tailwinds.

Please clink the link below to read more…

CLICK HERE TO READ THIS WEEK’S COMMENTARY!