Could be Time to Diversify Investments

As we move into the final two months of 2025, you could excuse the equity markets if they got a little spooked during Halloween.  The lifeblood for any market analyst is data, and it has been hard to come by lately.  The government shutdown, in its 35^th day as we go to press, is fast approaching the longest on record. 

But the markets for the most part have stood tall.  The S&P 500 is near its all-time high despite the data blackout.  We’ll do our best here to read between the lines and figure out where things stand for individual investors.  Last month we said, “Don’t Fight the Fed.”  Given our positive investment results, this month we might need to say, “Don’t Fight the Tape.”

Last month the Federal Reserve cut interest rates for the second time this year, lowering its benchmark rate to a range of 3.75% to 4%.  This move was made to stimulate activity and help support the slowing job market.  But maximum employment is only half of the Fed’s mandate.  The other element, maintain price stability, continue to be a challenge as inflation remains above the Fed’s 2% target.  Chair Jerome Powell explained that the Fed is trying to balance those two goals as they develop policy.  And because of that, he said that another rate cut in December is possible, but not guar\anteed, as opinions within the Fed are divided. 

Looking ahead, since the Fed has always claimed to be “data-dependent” we expect them to be cautious since their flow of economic data has been interrupted by the government shutdown.  The Fed’s next meeting in December will be important especially if there are more layoffs and inflation stays under control.  Without full government data, the Fed is relying on private reports to guide their decisions.  This uncertainty means the Fed may choose to “slow down” as Importantly, most global equity markets outperformed their US pears in 2025, underscoring a broadening rally beyond American shores.  The MSCI ACWI ex-USA index soared 32.4% marking its strongest performance since 2009. 

We believe the stock market has a reasonable chance of posting moderate gains in 2026, say 8-12% particularly if economic growth remains steady. 

History, however, offers a cautionary note.  After similar three-year runs, forward returns have often been disappointing.  In fact, all three of the strongest historical rallies were followed by negative five-year returns, underscoring the risk of late-cycle environments. 

The lesson to learn is that while further gains in 2026 would not be unprecedented, history suggests caution.  Extended rallies often occur near market tops, and growing enthusiasm around artificial intelligence has some analysts warning of bubble-like conditions.  Diversification and allocation rebalancing is an important principle to help protect for this possibility. We will monitor technical trends and cross-asset signals closely, as these indicators typically provide the earliest warnings of shift towards a cyclical bear market.