Quarterly Market Summary - January 21, 2026

Summary

U.S. stocks added another 2.6% last quarter, bringing its full year return to 17%[1].  It was a rather subdued quarter compared to the previous three quarters, and once again international stocks performed substantially better.  Investors felt a little more cautious about technology stocks last quarter as concerns grew as to whether the hundreds of billions being spent on artificial intelligence (AI) would have the kind of payoff that big tech stock prices implied.  As the focus shifted to industries that would benefit from AI (versus those that were producing it), health care emerged as a winner.  Utilities and real estate continued to struggle because both sectors are seen as beneficiaries of lower long-term interest rates.  While the Federal Reserve cut short rates twice, this did not do much to lower mortgage rates[2].   Investors are trying to figure out the economy in which profits are rising quite nicely but this isn’t leading to more job creation[3].

For several years we have been saying that international stocks are cheaper, but until this past year that really didn’t matter.  For U.S. investors, the strength of the dollar tended to cancel out much of the gains foreign markets made in the local currency.  Last year both factors needed to produce better foreign stock returns occurred; the dollar fell against most foreign currencies and local market stock performance was strong enough to close some of that huge fifteen-year performance gap.  Overall, foreign stocks rose 3.8% last quarter and 33.1% for the full year[4].  Brazil, South Korea, Taiwan, Germany and Canada all rose more than twice our 17% gain; India was the real laggard amongst major markets last year.

The U.S. stock market had a great run against foreign markets for dollar-based investors, but it looks like it may be over.  Relative investment performance is a metric that tends to trend, and the trend appears to have reversed.

Bonds rose 1.2% during the quarter to end the year up 7.2%.  This was the first year since 2020 that investors weren’t better off in short maturity bonds.  There was optimism about long term rates coming down in September and October, but that had dissipated by December.  The biggest profits on the bond side were in emerging market bonds, which rose about 3% last quarter and 14% for the year.  Money market returns were over 4.2% last year, but their annualized rate slipped under 4% by the end of the year.

Commodities were the strongest area of the market last year, specifically the metals sector.  Industrial metals rose 15.8% last quarter on increased demand for copper and aluminum for constructions.  Precious metals rose 15.6% last quarter and 68% for the year due to unprecedented demand for both gold and silver, having mostly to do with global political instability.  Crypto- currency had made some inroads in terms of replacing gold in recent years, but bitcoin’s small loss in 2025 showed that when you really need an alternative to the U.S dollar, only gold will do.

Activity

We reallocated portfolios in late September and October because we felt that the market had successfully navigated the seasonally weak late August through late September period without incident and would reward more aggressive positions to the end of the year.  We did not get the kind of “Santa Claus rally” that you get in some years. Defensive industries (utilities, real estate) did underperform those that are more economically sensitive (industrials, transportation), with the exception of health care.  We also worked hard from Thanksgiving to the end of the year to minimize capital gains.  Since stocks rose by 17% and bonds increased by 7%, there simply weren’t enough losses to offset those gains, so we did our best with what was available.  I guess lack of losses is a good problem to have.  The other issue we encountered was the rapid increase in the price of gold.  We established a 2% position in portfolios many years ago for those occasional periods of instability.  It seemed like all of 2025 was a period of instability, and those 2% gold positions become 3-4%.  We have been taking profits into strength, with our feeling now that gold should not exceed 3% to 3.5%.  At some point that degree of volatility can work against you.

Outlook

Any advisor will tell you that there is never any shortage of opinions about where the market is headed.  At the beginning of any year, every major investment firm has a webinar in which they give you their prediction for the year.  If they are a product shop (i.e. they sell investments), the predictions will almost certainly be bullish on both stocks and bonds.  On the other hand, if they sell research or analytics, they are often overly pessimistic because they feel that negativity makes them seem smarter.  We are making no prediction about investment returns this year because we just see too many wild cards out there.  Not least of these is the geopolitical and economic objectives of the United States, which seem to change on a weekly basis. 

Aside from that, AI spending and future revenues are the biggest unknowns in the market right now.   AI is already being used widely in industry to boost productivity, but there is no “killer app” yet.  Access to AI at this point is free for writing and editing purposes and is available at a reasonable subscription price for larger entities. That said, it has not reached the “I’ve got to have it whatever it costs” stage that binds you to it and gives providers a large, growing, and reliable income stream[5].  This could be a problem because many technology and related stocks are priced on the assumption that the high margin application stage will be reached.  Even if AI becomes essential, it's uncertain whether we could produce enough electricity to power all of the things we expect it to do.   So, in a sense we are building the proverbial bridge as we are crossing it. 

If this chart is true, then the big technology hyper-scalers will be spending so much money building out their AI programs that they won’t be able to afford much in the way of dividend increases or share buybacks.  Stock prices have already begun to reflect concern.

On the positive side, some parts of the market (small caps, emerging markets) that haven’t moved much over the past ten years (and are therefore reasonably priced) have been doing well lately.  If there is widespread disappointment with technology profitability, money will probably rotate into other sectors as long as the general economy holds up.  Interest rates are the key.  If the ten-year note can stay around 4%, we’ll probably be okay this year.

Commentary – Random Thoughts

In the absence of one unifying theme for this commentary, I’d like to present a few quotes and ideas and charts that have interested me lately.

Michael Cembalest is an investment strategist for J.P. Morgan whose research and ideas are “must reading” among financial professional these days.  A lot of what I know about the opportunities and challenges of AI are from his writings.  There are two things he has written recently that I have noted:

1.        “US technology price-to-earnings-growth ratios are only 1-3 times in recent years.  In the dot.com era stock prices were 4-8 times expected annual earnings growth”[6].  In other words, we have not maxed out at all what investors might pay at the top of the cycle.

2.       “After a correction, ask “what could go right” rather than obsessing over factors that led to the selloff.   And when markets are highly concentrated and near all-time highs, the right question to ask is “what could go wrong”[7].  He is saying that there aren’t enough people thinking today about what might go wrong because every sell-off since 2011 has been an opportunity to buy.  At some point, the market will cry wolf and there really will be a wolf.

Margin Debt is a measure of how aggressive (leveraged) stock market investors are in aggregate.  As you can see, we are at all-time highs.  This doesn’t mean we can’t go higher, but it does suggest that the current advance is pretty far extended.  When this measure starts to fall, often a recession is not far behind.

One of the reasons for the big surge in gold prices is the surge is buying by foreign central banks.  Why have they been buying gold and selling their U.S. Treasuries?  Every country has its own reasons, but China has been trying to diversify away from the dollar since the mid-2010s when the trade war with the U.S. intensified.  The sharp move in recent years has to do with widespread fears that the U.S. might seek to punish any country that did not fall in line behind it, much as it punished Russia economically after the Ukraine invasion and Iran before that.

The economy was not as strong last year as it appeared.  Largely, GDP rose because we spent more for health insurance.

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[1] S&P 1500 U.S. Stock Composite, via Standard & Poors.

[2] Because mortgages tend to be tied to it, the ten-year U.S. Treasury is seen as the key to the housing sector.

[3] Except in health care, but those are primarily lower wage jobs tied to taking care of senior citizens.

[4] JPMorgan Asset Management, Guide to the Market 1Q26.  In U.S. dollar terms.

[5] Like the iPhone, for instance, or Google.  You could use a different phone or search engine, but the network effects of both of these was overwhelmingly powerful.

[6] Michael Cembalest, JP Morgan - Eye on the Market

[7] Michael Cembalest, JP Morgan - Eye on the Market