The BIG Report: January 2026

As we close the book on 2025, I want to start with a sincere thank you. We once again received the Reader’s Choice awards from both the Delaware State News and the USA Today Delaware publications. We are grateful and even motivated by your show of confidence reflected in these recognitions and more so in the number of referrals that contact our office each week. Thank you.

2025 Performance & Risk

2025 was a particularly good year for our flagship models, generating returns of over 20% versus the S&P 500 at just over 16%. Some of you have understandably asked, “Are we taking on too much risk?” The answer is no.

One way we can measure how much risk is in a portfolio is with beta, which is a measurement of volatility relative to the S&P 500 (where the S&P is 1.0). Throughout 2025, our flagship model averaged betas of roughly 0.75 to 0.55 versus the S&P at 1.0. In plain English, we outperformed with significantly less risk.

The Outperformance Was Driven by Three Main Factors

• A purposeful move into international exposure on the first day of the year.

• Strong stock selection.

• Timely risk management as we raised over 20% cash at the end of March and then redeployed that cash after the “tariff tantrum” created a better entry point within weeks.

Closely studying the markets and proactively adjusting allocations served our clients well for 2025, but what about 2026?

I wish I could tell you everything is going to be great, include a clever anecdote and wish you a Happy New Year…… HAPPY NEW YEAR! (you’ll have to settle for one out of three).

When We Look at the Market Entering 2026…

When we look at the market entering 2026, several historically important risk factors are converging all at once. None of these are perfect timing tools on their own but taken together they have our attention.

1) Midterm Election Year

A midterm election year is upon us. The average drawdown during a midterm election year? -19%. The average annual gain? Only 4%.

2) 3 Back-to-Back Years of Double-Digit Gains

The S&P 500 just completed 3 back-to-back years of double-digit gains. The average gain in the following year? Only 4.6%. It only went on to make another double-digit gain on three occasions over the last 85 years.

3) New Fed Chair in May

A new Fed Chair will be installed in May. The market likes to “test the new sheriff”, averaging a 15% correction in the first 6 to 12 months of a new Fed Chair taking office.

4) Valuations Are Extremely High

The market is expensive. I mean really expensive. Taking the most prominent methods of valuating the stock market and melding them together, we’re in one of the 4 most expensive markets in history joining 1929, 1966 and 1999.

5) Consensus Expectations

Our entire industry appears to be expecting a good year in 2026. I have learned to be cautious of “consensus” as the market tends to cause the most amount of pain for the greatest number of people possible at any given time, especially for those in our industry.

Bigger Concerns Brewing

In addition to the concerns for 2026, there are bigger concerns brewing as well. We’ve talked in the past about cyclical vs secular bear markets. Cyclical = a short-lived downturn, think 2022. Secular = long term underperformance with big declines, think 1999 – 2009. Up to this point, the early to mid 2030’s have been on my radar for the potential start of a secular bear market, but some of the warning signs I would be looking for are beginning to show themselves now.

1) Concentration Risk

Concentration Risk – You may have heard of the Magnificent 7 or Great 8. This refers to 7 or 8 stocks that have been driving the majority of S&P 500 gains. When concentration peaks, bad things tend to happen afterwards. Think …1905, 1937, 1964 and 1999. We have extreme concentration now but whether its peaked, remains to be seen.

2) Credit Spreads

Credit spreads, the difference between higher risk junk bonds and safe U.S. Treasuries are extremely tight, hitting a difference of only 2.5% in January 2025. The last two times they were this tight – 1997 and 2007.

3) Investor Leverage

Investor leverage. When margin debt (people borrowing money against their stocks to buy more stock) grows 5% more than S&P 500 earnings, bad things tend to happen. In 2025, margin debt grew approximately 40% while S&P earnings grew 18%. These numbers are reminiscent of 1999, 2007 and 2021.

4) Low Unemployment + Expensive Market

Extremely low unemployment with a very expensive market. Similar scenarios were seen in 1929, 1966, 1969 and 1999.

What This Means (and Doesn’t Mean)

Do any of these things mean the market is going off the rails? No. Do all of them together mean the market is going off the rails? No. Do they mean we should NOT be complacent and consider additional risk mitigation? Absolutely.

With this sounding so bad, why not sell it all? Because markets can be irrational in extreme ways and for long periods of time. One date that came up a lot was 1999. There was a point in 1999 where all of these secular bear market signals were present, yet the NASDAQ made an additional 100% return in just a matter of months before things finally started to unravel. Other parts of the market did pretty well for a couple of years. We simply don’t know how long this market will continue to push higher or if AI growth, robotics, quantum computing and economic policies could all grow enough to support these valuations. History has no lock on the future, but human psychology remains rather consistent and so we stay on guard.

Positioning Going Into 2026

The fundamentals look okay for now. The job market has been soft but not imploding and economic growth has been very strong. Setting the “secular bear” concerns aside (as we are FAR from one of those), we would expect a subdued return with extra volatility in 2026.

As such, we’ve taken our foot off the gas by reducing U.S. market exposure and adding to hedges that we feel will perform well during heightened volatility while not being too much of a drag if markets push higher. As such, we believe we’re positioned to do well if the market continues to be constructive while holding up very well if it doesn’t.

Secular Bear Market Plan

As for the secular bear, it’s simply on our radar. There is one very simple and extremely accurate technical indicator that will be our guide. If it indicates a change in secular trend, we can easily adjust our strategy. We made plenty of money for our clients in the secular bear of the 2000’s, we can do it again.

Closing

I know this is not as upbeat as you may have hoped for but better to be frank and emotionally prepared than to have exuberant expectations and be disappointed. Rest assured we have a plan and are ready to execute whichever direction this market decides to go.

Happy New Year! And thank you as always for your trust and confidence.

David F. Boothe

President, Chief Investment Officer