After a volatile but flat November, December brought the S&P 500’s first negative month since April, declining .05%. The DOW gained .74% and the NASDAQ shed .76%.  Mid and small caps pulled back .10% and .25% respectively. Bonds were down about .10%.  Foreign stocks caught bid, with the developed non-U.S. index (CWI) up almost 3% on the month, and emerging markets (EEM) up 2.6%.

TWG Growth, moderate and conservative portfolio results for December were -.03%, .05% and .09% respectively, virtually unchanged.

2025 IN REVIEW

Initially rising more than 4% in the weeks following the Presidential inauguration, the market sold off mid-February on news that Deep Seek, a Chinese company, claimed they were able to create a viable Large Language AI Model (LLM) at a fraction of the cost incurred by U.S. hyperscalers. Just as those concerns started to abate and the market looked as if it was resuming its uptrend, President Trump announced his Tariff plans, causing the market to experience a sharp selloff over the following week. From the mid-February peak to the mid-April trough, the S&P almost entered a bear market, declining just less than 20%. When President Trump announced a 90-day pause in the implementation of declared tariffs, the market started to recover and rallied through October. November and December experienced elevated volatility, and the market failed to close the year at an all-time high.

During this tumultuous period early in the year, foreign stocks were already outperforming the U.S. markets, which trend accelerated post liberation day as there appeared to be divestment in anything U.S. related because of the tariff policies. U.S. bonds and stocks were both sold off, and money went elsewhere. While TWG portfolios did begin to accumulate exposure to international stocks in the first months of 2025, the selloff in U.S. equities overpowered the foreign exposure, resulting in TWG portfolios to underperform their benchmarks during Q1, but outperforming their benchmarks ex-foreign stocks. Cash was raised and risk was reduced during the April selloff, but another sharp V-shape recovery left our portfolios misaligned to fully participate in the initial rebound.

As markets started to recover from the April 8 cycle lows, our tactical portfolios began to course correct, moving cash back into equities, mostly in the lower risk and value categories, as caution was warranted in the face of so much uncertainty resulting from the surprising shock of the tariff announcements and ensuing off and on rhetoric coming out of Washington. Stocks were ultimately able to recover as it appeared that the revised tariff levels were not as bad as initially declared.

For most of the rest of 2025, international stocks lagged the U.S. market, and TWG portfolios performed in line with their benchmarks before fees. Advances off the April lows were nothing short of surprising. The S&P 500 rallied over 30% from the April lows to year end. TWG portfolios were back in the pocket by May 1, and our recovery started to accelerate to year end.

From April 9 to year end, TWG growth, moderate and conservative, gained 27%, 23% and 20% respectively, net of fees vs. their respective benchmark of 35%, 29% and 24%.

From May 1 to year end, TWG growth, moderate and conservative, gained 19%, 17% and 14% respectively, net of fees vs. their respective benchmark of 21%, 18% and 15%.

In summary, the balance of managing risk and seeking gain was a successful endeavor. Returns were more than what is modeled in your comprehensive financial plan, resulting in an increase of your plans’ probability of success.

PORTFOLIO ADJUSTMENTS

To start December, TWG portfolios exhibited a diverse mix of equity and fixed income ETF’s, with a significant tilt towards growth and technology exposure through QQQ (NASDAQ 100) and SMH (Semiconductors). Core broad market equity is held via SPYM (S&P500), complemented by value and small-cap slices like VTV, IWD and RPV, each modestly weighted. The inclusion of fixed income elements HYG (high yield bonds) and a small position in DBMF (managed futures) added diversification and stability. This foundational allocation set a growth-oriented posture with balanced diversification, positioning the portfolio for potential appreciation while managing downside risk through selective fixed income and defensive equity sectors.

By the middle of the month, portfolios reduced QQQ and increased SMH, reflecting a shift towards more focused technology. Additionally, new ETF’s such as SPGP (growth), MOAT (blend) and IEV (Europe) were introduced, broadening style and regional diversification. The portfolio combined thematic concentration in technology with enhanced diversification through strategic style and international exposures, aiming to capture different market segments and reduce idiosyncratic risk. Beta was elevated due to SMH, but improved capture from quality/style ETF’s and international equity balance the risk-return profile.

By the end of the month, TWG portfolios saw subtle shifts reflecting ongoing refinement. QQQ and SMH remained dominant, anchoring growth and technology exposure. Exposure to IEV was increased, EEM (emerging markets) was introduced and the addition of SPYV increased more value style exposure. The overall beta exposure remained elevated due to tech concentration but offset by growing diversity in style and geography. These incremental adjustments were designed to balancing growth potential with diversified risk sources and style risk, aiming for smoother drawdowns and sustained alpha generation over time. SMH exhibited heightened volatility during the month but ultimately outperformed. EEM added value towards the end of the month and complemented geographical exposure with the position in Europe. Both outperformed the S&P on the month.

LOOKING FORWARD

We expect the U.S. stock market’s growth streak to continue in 2026, fueled by rising earnings, falling interest rates, government stimulus, and consumer spending. Less regulation and tax cut extensions should also be supportive of earnings growth. Consensus real GDP growth forecasts for the U.S. are projected to be in the mid-2% and core inflation is anticipated to ease closer to 2% by the end of the year, aided by slowing wage growth, lower energy costs, and productivity gains. This disinflationary trend should allow the Fed to cut rates further.

Development of generative AI should allow for productivity gains across many industries. Such efficiency theoretically should boost earnings and enable non-tech companies to flourish from this new technology.

Over the past months, mega cap technology stocks have exhibited weakness relative to their dominance during the last three years. Semiconductors had their share of ups and downs, but the trend remains constructive and affords periods of significant outperformance. Funds are flowing into other areas of the market (financials, healthcare, small caps), suggesting a more durable broadening than we’ve seen in the past handful of years. This is encouraging, and, given the expected productivity gains from AI, there is a likelihood that earnings growth outside of a handful of mega cap technologies can transpire.

Earnings season starts on January 13, with many big banks expected to report robust quarterly results.  Financials have outperformed the market over the past two years, aided by a steeping yield curve and lower regulatory restrictions. We anticipate positive earnings, which would support current valuations, even if they may be a bit stretched. Corporate guidance should have a bigger impact on price action after earnings announcements, and if corporations continue to show confidence in their business’s future, the market can continue to move higher.

Not that there are no worries on the horizon – there always are. The U.S. economy has weathered significant events that many bright minds would think could have a negative impact, but the market keeps moving forward. We see the Q1 being more of the same.

We wish you a happy new year and look forward to seeing you soon.