Bond Markets Overview:  Fixed income markets across various sectors had a favorable year, with bond prices advancing in 2025. U.S. Treasuries, investment grade corporates and high yield bonds all elevated in price as the Fed teetered on easing rates throughout the year, with affirmation of a lower rate trend towards the end of 2025.  Our best performing fixed income portfolio holding was EIDOX – returning 17.20% for 2025 – a very impressive outcome for a non stock portfolio holding.

The Fed’s trajectory, along with still attractive bond yields in 2025, drove demand throughout the year. Uncertainty in the equity markets added to demand for bonds as volatility led to greater bond demand. The 10-year Treasury bond yield finished the year at 4.18%, down from its peak of 5% in October of 2023. Bonds had their best year since 2020, when the pandemic drove funds toward bonds as a safe haven and for stability.  I don’t see the 10-year trading materially below 3.75-4 percent during 2026.

The President proposed that the federal government buy approximately $200 billion of mortgage bonds through housing authorities Fannie Mae and Freddie Mac, in an effort to push mortgage rates down and increase housing affordability. I’ve advocated for this policy since 2024. Buying mortgage bonds in the open market curtails the supply of bonds which can lead to lower mortgage rates.  So far, just the suggestion of this action has caused mortgage rates to dip.

Equities Advance in 2025 – Domestic Equity Market Overview:  Equities were volatile, yet resilient throughout 2025 as uncertainty surrounding tariffs, geopolitical tensions and Fed rate cuts induced volatility. The Dow, S&P 500, and the Nasdaq all posted strong performance results for the year, exceeding most analysts expectations.  The outcomes fell within my targets.

The bull market in the SP500 is showing welcoming signs of broadening.  Across all equity related model portfolios, I’ve further increased exposure to small & mid sized companies, which I anticipate will contribute to our consistently strong performance.  Our international exposure will likely also enhance our investment outcomes.  Although I anticipate another year of high volatility, and I do not discount the possibility of a 10-15% correction, I’m forecasting the SP500 will trend towards 7600-7700 by year-end.  Accelerating productivity should add 1% to the GDP, further reduce inflation, and stimulate broad based corporate earnings growth.  I remain optimistic about my favorable economic and financial market thesis.  But as always, remain guarded and vigilant.

Fiscal Tax Policy:  For 2026, nine states are reducing their individual state income tax rates, Georgia, Indiana, Kentucky, Mississippi, Montana, Nebraska, North Carolina, Ohio, & Oklahoma. Currently, nine states have zero state income tax. California currently has the highest tax rate at 13.3%, followed by Hawaii at 11%, and New York at 10.9%.  OUCH!

How AI Is Affecting the Economy – Technology & The Economy:   Artificial intelligence (AI) is currently boosting U.S. economic growth and market valuations, while also creating valuation risks, labor disruption, and energy challenges.  Although there are some adverse considerations, the positives are more than counterbalancing.  AI is a major driver of my productivity boon thesis – enhancing economic activity, reducing inflation, and further stimulating corporate earnings.

AI related investment in software, semi-conductor chips, data centers, power infrastructure, and networking has already added on the order of hundreds of billions of dollars to U.S. GDP since late 2022, with one estimate putting the contribution at around 250 billion dollars. Economists expect AI to raise productivity, yet unevenly among industries as various companies integrate AI into manufacturing, production, and service.

Thus far, AI appears to be a minor factor in the 2025 labor‑market slowdown, but economists expect that wider diffusion could displace some jobs even as it creates new tasks and demand in other roles.  Maybe someday the computers and robots will do all the work and humanity can chillout on the beach with an umbrella drink.  If it was only so simple.

Policymakers and researchers note that the main near‑term macro risk is not mass unemployment, but resulting in retraining, regional dislocation, and pressure on lower‑skilled occupations.  This societal segment is likely the first and most displaced by AI.

AI has been a dominant equity theme, helping propel S&P 500 performance in 2025, with a large share of returns concentrated in AI‑linked megacap tech, data‑center, chip, and cloud companies.  Regulators and analysts are considering whether AI‑driven optimism encourages excessive leverage or speculative behavior in equity and credit markets, which could amplify any downturn. At the same time, diversified adoption of AI across sectors is seen as a potential cushion against shocks, making the U.S. economy somewhat more resilient if productivity effects materialize as expected.

What Happened To Consumer Confidence in 2025 – Consumer Behavior:   The beginning of 2025 revealed that consumers were optimistic because of low unemployment, ongoing job growth, and stable inflation. Yet, by the end of 2025, optimism had fallen sharply, with more consumers reporting pessimism and cautious feelings about the economy as inflation, job scarcity, and living costs led consumer worries. The University of Michigan consumer sentiment index stood at 64.7 in January 2025 then fell to 51.0 by November, eventually edging up to 52.9 in December and leaving sentiment well below historical norms.

Behavior and spending signals in 2025 found more consumers opting for cheaper goods and prioritizing essentials, with many cutting back on discretionary purchases and major expenditures. By the fourth quarter of 2025, net sentiment was 30 percent below its late‑2024 peak, underscoring how uneasy consumers felt heading into 2026.  (Source: University of Michigan Consumer Sentiment Index; FRED)