First and foremost, best wishes for a Safe, Prosperous & Healthy New Year!
This has been a challenging decade for investors with many long-forgotten events crammed into the past six years, which have availed us to scenarios NOT seen for decades. We can now backtest portfolios against events, such as a pandemic, the highest inflation in four decades, along with an aggressive FED rate hiking cycle, which caused precipitous declines in both the stock and bond markets in 2022. If volatility was a concern during the April 2025 market swoon, now is an opportune time to consider changing your portfolio’s asset allocation.
Even with more scenarios to backtest against, “Past performance is NO guarantee of future results”!
The erratic tariff policies of the administration have caused chaotic disruptions in both the stock and bond markets[01]. Liberation Day tariffs sparked a sharp market decline in April 2025 that considerably elevated investor anxiety levels, especially for those nearing retirement! The Administration's 90-day tariff pause[02]provided investors with a temporary reprieve allowing the market to recover to new highs. As tariffs are a tax, which Congress has legislative authority over, SCOTUS has yet to rule on the legality of President Trump’s sweeping tariff policy, which could have broader implication on this Administration’s trade policy.
Companies front-loaded purchases at lower costs in anticipation of tariffs[03] and importers have absorbed a portion of the price increase caused by tariffs[04] but businesses are warning about passing on more of the tariffs to customers[05]. If inflation increases from the tariff policy, a new concern could be that of stagflation with slower economic growth and higher interest rates, which is another peril not seen since the 1970's.
The higher interest rate environment enables bond funds to provide a viable income stream with possible appreciation when rates recede. With increased bond fund dividends resulting from higher rates over the last few years, there is a less compelling reason to have more equity risk than needed to get the desired rate of return. Also, bond funds should provide better diversification benefits than when interest rates were near zero. The ballooning National Debt to over $38 Trillion Dollars will eventually come home to roost[06] with interest rate payments now exceeding $1 Trillion Dollars per year.
Because of increased deportations and restrictive immigration policy, agriculture, construction, and hospitality services may likely suffer labor shortages[07], which could drive up wages for those service sectors. Because of announced and/or companies expecting layoffs[08] along with the lack-luster job market, the FED may lower short term interest rates to spur the economy, which may reignite inflation forcing long-term rates higher. Also, a new FED chairperson will be nominated in Spring 2026 who will likely be more aligned with the President’s policy on interest rates.
It is rare for both GOLD and equity markets to reach record highs at the same time, since GOLD is considered the ultimate safe haven[09] during periods of market instability and usually moves differently from equities. However, geopolitical turmoil, sticky inflation, de-dollarization[10] and concerns over FED independence puts Gold and precious metals in the spotlight as said assets provide an inflation hedge, especially with a declining dollar of nearly 9% last year relative to a basket of global developed-market currencies [11].
The Artificial Intelligence mania is eerily reminiscent to the Internet Bubble of the late 1990’s with the notable exception that at least this time the most expensive companies are growing and have earnings. To further bolster growth, circular funding deals where suppliers, customers and investors overlap[12], has similarities to the late-1990’s internet bubble behavior where network equipment manufactures and fiber optic companies provided financing to purchasers of their equipment.
The equity market rallied in 2023 and 2024 lead by the “Magnificent 7” with the Top 10 stocks representing nearly 40% of the S&P index[13]. The long-awaited rotation from Growth to Value may have finally arrived as 2025 was still another good year for stocks but none of the “Magnificent 7” stocks were among the top twenty-five performers[14]. The beneficiaries of the broadening market breadth were the cyclical and value-oriented sectors[15]. Also, International stocks had a stellar year in 2025, outpacing US markets by a wide margin[11]. Nevertheless, the growing number of delinquent loans and bankruptcies calls for caution despite market optimism[16].
The A.I. buildout is fueling growth but masking a weaker economy[17]. As company’s report earnings, investors are coming to the realization that the Artificial Intelligence mania has been more of an expense and less of a revenue generator[18], which has taken some of the froth out of “Magnificent 7” stocks. As the Artificial Intelligence mania broadens from “creators” to “adopters”[19], the winners will be those companies that can unleash productivity enhancements and lower costs by using the technology. A surprise winner in the A.I. build-out is the Caterpillar Corporation because of its gas-fired turbine power generation equipment[20],which are essential for generating electricity for data centers.
Commercial Real Estate, as tracked by theNCREIF index[21], appears to have bottomed out and has had positive returns for the past few quarters. Commercial Real Estate, as an asset class, has a low correlation to both stocks and bonds and therefore makes a good portfolio diversifier[22] and inflation hedge[23]. Also, Commercial Real Estate has an elongated business cycle[24], which further enhances its diversification benefits. However, housing affordability[25] continues to be a problem because of high mortgage rates and lack of inventory that has kept home prices high. Families with low-interest rate mortgages are reluctant to move[26] because of the high mortgage rates to finance a new home. The overall shortage of housing will likely increase rents and correspondingly increase the value of Apartment buildings.
As Louis Pasteur so eloquently said, “Chance favors the prepared mind.”
Geopolitical tensions around the world are on the rise[27] could add to market volatility. A recent geopolitical development, buried under other headline events, is the escalation of tensions between China and Taiwan[28]. Another potentially longer-term problem could be the Administration’s deemphasizing the development of renewable energy technologies and resources, which China dominates, especially in the supply of rare earth minerals[29] with about 90% of global processing.
The market is expensive by many metrics, such as the Price/Earnings ratio and ShillerPrice-to Earnings (P/E) Ratio[30], which is commonly referred to as the Cyclically Adjusted P/E Ratio, or CAPE Ratio. Another telling sign of investor euphoria is that of record high margin debt[31] with investors borrowing money to buy stocks. Unfortunately, should the market suffer a sharp decline, said borrowers will likely have to sell their stock purchased with borrowed money to cover margin calls, which could exacerbate the decline. The unregulated shadow banking system could be the cause of the next crisis[32]. Lastly, consumers are tapped out with 11% using credit card debt to pay for monthly essentials[33].
With markets near all-time highs and are richly priced, Caution is the Watchword!
The best defense in volatile markets is a highly diversified portfolio composed of low-correlated assets used in conjunction with a well-articulated management strategy. If you’re concerned about portfolio volatility, a member of the Iron Belt Partners Team will gladly discuss those concerns and options with you. We can be contacted via phone at (724) 493-9473 or via Email at:
Lindsay M. Turchetta LTurchetta@lpl.com
John D. Martin JDMartin@lpl.com
Working as a team to better serve our clients!
Iron Belt Partners is a name used by independent advisors associated with LPL Financial.
This communication is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. You should consult your tax, legal, and/or financial advisor prior to making any financial decisions. The views expressed here are those of the authors, John Martin & Lindsay Turchetta, and not necessarily those of LPL Financial. Information is based on data gathered from what are believed to be reliable sources. The opinions and other information contained in this article are subject to change continually and without notice of any kind. Forward-looking statements are subject to assumptions, risks, and uncertainties, which change over time and may not happen. Past performance does not guarantee future results.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal.
Past performance does not guarantee future results.
Asset allocation does not ensure a profit or protect against a loss.
Precious metal investing involves greater fluctuation and potential for losses.
The index references herein are unmanaged and cannot be directly invested in.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio, and diversification does not protect against market risk.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing in mutual funds involves risk, including possible loss of principal. Fund value will fluctuate with market conditions, and it may not achieve its investment objective.
Bonds are subject to credit, market, and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Duration is a measure of the sensitivity of the price (the value of principal) of a fixed income investment to a change in interest rates and is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest-rate risk or reward for bond prices
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
[01]Source: “Erratic Tariff rollout Creates Chaos for Businesses and Markets” on goldsilver.com
[02]Source: “Trump pauses most of his tariffs for 90 days” on cbsnews.com by Kathryn Watson
[03]Source: “Tariff front-loading buoyed manufacturing in H1” on supplychaindive.com by Katie Pyzyk
[04]Source: “4 reasons worst economic damage may be yet to come” on msn.com by Alex Henderson
[05]Source: “Trump’s tariffs being passed on to American consumers” on msn.com by J.R. Duren
[06]Source: “$38 Trillion Dollar debt is to blame for over $1 Trillion interest payment” on fortune.com by Nick Lichtenberg
[07]Source: “Deportations and Immigration Restrictions, Agriculture, Construction & Hospitality” on bakerinstitute.org
[08]Source: “Major employers signal layoffs in January” on msn.com by Shane Rowe
[08]Source: “60% of US companies brace for brutal layoffs as economy shifts” on msn.com by Silas Redmond
[09]Source: “Silver surge masks quiet risk” on msn.com by Charley Blaine
[10]Source: “How Central Banks are fueling the next chapter for Gold” on PlanetBankNote.com
[11]Source: “International stocks reignite” on Fidelity.com
[12]Source: “AI boom’s reliance on circular deals is raising fears of a bubble” on yahoo.com by Rob Wile
[13]Source: “stock market just flashed a ‘Hindenburg Omen’ warning” on Indiatimes.com by Cam Hui
[14]Source: “Broadening Market Participation for 2026” on Evansmay.com by Brooke May
[15]Source: “Market Breadth expands beyond the Magnificent 7 as 2026 begins” on financialcontent.com
[16]Source: “Bankruptcy Filings Rise” on uscourts.gov
[17]Source: “AI boom is lifting the stock market, but it may be masking a weaker economy” on cnbc.com by Charlotte Morabito
[18]Source: “Stocks tumble as AI jitters rattle Wall Street” on bnnbllomberg.ca by Rita Nazareth
[19]Source: “A.I. Boom Could Shift from ‘Creators’ to ‘Adopters’” on msn.com by Kevin Gordon
[20]Source: “Caterpillar Emerges as Unlikely AI winner on Turbine Demand” on Bloomberb.com
[21]Source: “Quarterly Returns under NCREIF Property Index (NPI)” on ncreif.org/data-products/property
[22] Source: “Diversifying with Real Estate and Infrastructure” on Investopedia.com by Brian Bloch
[23] Source: “How Commercial Real Estate Can Be Seen as an Inflation Hedge” on amnestymedia.org
[24]Source: “The GREAT 18-year Real Estate Cycle” on CATO.org by Steve H. Hank
[25]Source: “US Housing Market Grapples with Record-Low Affordability” on msn.com By Emmanuel Abara Benson
[26]Source: “How Do Rate Cuts Affect Housing Affordability?” on Richmond Federal Reserve Bank By John O’Trakoun
[27]Source: “Middle East Conflict, Russia-Ukraine War and Venezuela Tensions” on cfr.org
[28]Source: “The war on the horizon that global economies haven’t priced in” on msn.com by Liam Halligan
[29]Source: “Market Concentration of Rare Earth minerals” on Michigan Journal of Economics by Madeleine Rzad
[30]Source: “Wall Street's $7.8 trillion warning has reached a deafening tone” on msn.com by Sean Williams
[31]Source: “Margin Debt Up 0.9% in December, Hits Another Record High” on advisorperspectives.com by Jennifer Nash
[32]Source: “Could Shadow Banking Cause Another Crisis” on investing.com by Avi Gilburt
[33]Source: “2026 Report Forecasts an Era of Consumer Spending Restraint” on yahoo.com