Markets are like escalators: they go up and they go down. Do you have a game plan for managing these changes? | | Market Update - January 2026 | |
- Stocks were broadly unchanged during December. Financials, Communications and Basic Materials did well; Utilities, Real Estate and Health Care did poorly.
- Bonds slipped slightly during the month, with High Yield bonds doing well, while Convertible Bonds performed poorly.
- Silver reached an all-time high, triggering the commodity exchanges to change the margin rules to reduce risk. This resulted in a steep sell off from its $82/oz high on December 28th.
- Inflation remains muted allowing the Fed to cut interest rates one more time to a target range of 3.5%-3.75%.
| | Table 1: Market performance estimates as of 12/31/2025 (LIMW) | | Behold, the up escalator... | | Figure 1: S&P 500 performance 2020-2025 (LIWM) | | |
Like an escalator markets go up and down. What is your game plan? Do you even have one?
Returns on stocks over the last few years have been remarkable. Let's look at recent S&P 500 full year returns:
2025 +17%
2024 +25%
2023 +26%
2022 -18%
2020 +18%
If stocks return 20% per year for the next 20 years, who needs a financial planner or investment advisor? Nobody. Yet we exist and many experienced investors use us.
Deep down, we all know that these remarkable returns can't last forever. Bad years are inevitable, as we bitterly learn studying history.
Did you buy in April 2025 after stocks had fallen 22% from the highs? Stocks have risen 42% from that point. Have you done any rebalancing this year at all? Maybe, maybe not. Like I said before. You need a game plan.
We have detailed strategies for all of our clients that include dollar-cost-averaging plans and portfolios with dynamic weightings designed to take advantage of these enormous moves. We are happy to design one for you.
Stocks have done so well, in fact, we could almost compare the current market to other "melt-up" periods in recent market history. If we define a melt-up as some distance above the 200-week trailing moving average of price, we can compare today's bull market with others. The results are interesting.
Today's markets are not quite as extended as in 1929 or 2000, but very comparable to 1987 and 2021. In all four cases, the Fed was raising interest rates to slow down the economy. There are obvious differences today's circumstances.
Table 2: Market peak distance above the 200-week average (LIWM)
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... and the down escalator
Figure 2: Aggregate bonds 2019-2025 (LIWM)
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Bonds. Yawn. (Please don't skip this paragraph).
Bonds are one of the most hated asset classes in the world right now. Famous investors such as Ray Dalio, Stanley Druckenmiller, Michael Burry and David Gundlach have all bemoaned the horrible state of our federal budget and the likely long-term damage that will be caused by runaway federal debt and spending. This is likely a good long-term forecast, but life in the investing world does not move in straight lines.
There is an old trader saying: "What everybody knows isn't worth knowing!"
Here is what everybody knows about 2026:
- The economy is doing great.
- Tariffs don't matter.
- Tax cuts were extended as hoped for.
- The Federal Reserve is cutting interest rates.
- Oil prices are likely to stay relatively low.
- Employment is fine, but weakening.
- Inflation is slowing down.
And yet, bonds did ok in 2025 despite all the good news. We think the odds are high that any economic problems will drive more cash into US Treasury bonds during 2026, pushing up prices and pressuring down yields. This counter-intuitive behavior happened during the 1970s during the Great Inflation. Even though the broad trend was down for bonds during the 1970s, there were short periods they worked as investments.
We have a positive outlook on bonds for 2026 for now and one of the key reasons is that it is a widely hated asset class.
Figure 3: Consumer Price Index, US 10-year Treasury yields and Federal Funds rates 1960-1980 (LIWM)
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On the other hand, there are powerful forces at work that will create a long-term inflationary problem. Our positive outlook on bonds is a short-term position, subject to policy changes and news flow.
One key development today is the blatant politicization of Federal Reserve monetary policy. Governments inflate their currency to cheat bond investors and escape from onerous debt obligations. This tweet from President Trump makes no bones about what he wants: low interest rate and growth, inflation be damned!
There are improving odds of the 1970s repeating again. Get ready.
Figure 3: Recent social media post by President Trump (President Trump)
| | On multiple metrics, equity valuations are unattractive | | |
There are numerous ways to measure equity market valuation. Some look at price-to-earnings ratios, others look at deviations from long-term valuation averages. As with many things in economic analysis, there is no definitive answer, but they are interesting hints as to what the real situation might be.
This first figure looks at deviation from long-term averages. You can see that we are extremely overextended to the upside using these metrics.
Figure 4: Four valuation indicators deviation from long-term average (VettaFi, advisorperspectives.com)
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The next chart uses the methodology of Nobel-prize winner Robert Shiller. His cyclically adjusted price-to-earnings ratio (CAPE) is averaged over 10 years to smooth out cyclicality and get a more accurate reading.
As with other methods, this one shows that while higher than the 1929 episode, we have not yet exceeded the 2000 experience.
Figure 5: Shiller Cyclically Adjusted Price-To-Earnings (CAPE) (Bloomberg)
| | Valuations can remain high for many years. However, falling stock markets are bad for national morale and many government leaders benefit financially from a rising stock market. For this reason, professional investors typically do not make decisions based on valuation. But they keep a close eye on this metric because any type of economic slowdown could trigger a nasty mean-reversion trade to more normal valuation levels. This would imply much lower stock prices. | | The long-term growth outlook is poor | | |
Demographics are destiny and from a growth perspective, they don't look good.
For the last 100 years or so, rising population and increased consumer spending have been major drivers of economic growth. In recent decades, however, as women permeated the workforce, family formation fell and the number of births declined significantly. This means fewer potential future families, fewer children, less workers and lower consumer spending going forward.
Figure 6: Employed Females Childbearing Age v. Annual Births (Econimica)
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Yet, despite the decline in population growth, the percentage of the population employed is also in secular decline. Notice that the ratio of full-time employees/16+ population peaked in the year 2000. This was the year China entered the World Trade Organization, trade barriers fell, and many factory jobs moved overseas.
It's hard for families to thrive when there aren't any jobs to support them. No families, no children; no children, no spending; no spending, no growth.
Between the fall in births and declining employment, it is likely we see stagnant growth at best in the developed world for decades to come.
Figure 7: Full-Time Employees Compared to Population (Econimica)
| | Leading indicators still weak | | |
A recent update on the Leading Economic Indicator index revealed ongoing weakness. This should not be a surprise since most of the stock market growth is coming from a small handful of names (ie Artificial Intelligence darlings Microsoft, Google, Amazon, Nvidia and Oracle).
This is a cautionary analysis that tells us to be very careful about technology spending growth. If the AI growth engine stops, we may see some heavy selling in the broad stock indexes without a pickup in growth in other sectors.
Figure 8: Consumer expectations for labor (University of Michigan)
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Here is another stunningly low Consumer Confidence reading. The average consumer and voter is NOT happy. This is a record all-time low.
Figure 9: Current economic conditions index (University of Michigan)
| | Looking for clues and leading indicators | | |
In addition to technology capex on artificial intelligence, let's also keep an eye on Japanese stocks. There are dramatic changes occurring in Japan that may change global capital flows that will impact US markets.
First, Japan's central bank is raising interest rates in response to multi-decade inflation highs and a weak currency. So far, these policies have not helped in supporting the currency or slowing inflation. Second, Japan's central bank has an enormous pile of Japanese stock and bonds and they are beginning the process of selling them. In the world of finance, this means the central bank is sopping up excess liquidity (ie bearish). Third, Japan's demographics are even worse than ours, aggravating the long-term growth outlook.
The next chart lays out the Japanese central bank policy rates in the lead up to the financial crisis. Notice the Nikkei 225 stock index peaked in early May 2006, almost a full year before the S&P 500 which peaked in July 2007.
Figure 10: Japan's Nikkei 225, Bank of Japan Assets and interest rates 2002-2012 (Econimica)
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Today, we see an uncanny similarity to 2006: Japan's central bank raising rates, Bank of Japan assets falling, and a new high in the stock market.
It is impossible to predict when a top will occur. However, Japanese economic policies affect global markets and today their policies are negative for both stocks and bonds.
Let's keep a close eye on Japan's stock market and US technology capex spending as we go through 2026.
Figure 11: Japan's Nikkei 225, Bank of Japan Assets and interest rates 2015-2025 (Econimica)
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It has been an interesting year. Our strategy of changing asset allocations at extremes worked well: after being underweight stocks in the 1st quarter 2025, we rotated into stocks during the April sell-off and rode most of the rally overweight stocks till late August.
Many investors with aggressive allocations have done very well since the pandemic and are feeling invincible. Please remember that the markets love to punish confidence. There is an old trader's saying: "The market moves in the direction to cause the most pain." In your own portfolio, do you know where your pain points are?
Several prominent bears have been put out of business in recent years. Jim Chanos in 2023 and Michael Burry in 2025 both closed their hedge funds. There is a narrative that "Nothing stops this train", but I can assure you this was the temperament of investors during the late 1990s. Be careful when everyone rushes to one side of a boat.
As always, we welcome your feedback and are happy to discuss our research and how it applies to your situation.
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Rob 281-402-8284
Chris 281-547-7542
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Christopher Lloyd, CFP ®
Vice President and Senior Wealth Planner
Lloyds Intrepid Wealth Management
1330 Lake Robbins Dr., Suite 560
The Woodlands, TX 77380
281-547-7542
Chris.Lloyd@lloydsintrepid.com
www.lloydsintrepid.com
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