***Q4 Client Report***
Similar to the third quarter, the fourth quarter of 2025 saw many events in terms of geopolitics, markets and the economy. Returns in the financial markets moderated from their breakneck paces of Q2 and Q3 with the S&P 500 and NASDAQ 100 both up more than 2%. The bond market also gained almost 1%. Gold and silver soared while oil fell again. Bitcoin peaked and began another large plunge.
I will say this. Although we have started trading Bitcoin ETFs, I continue to laugh at the narratives the perma-bulls spin. First, it was that Bitcoin is a great hedge against a falling dollar. That was proven wrong. Then it was that Bitcoin is a great hedge against inflation. Investors executing that trade blew up. After that we were told that Bitcoin was a great hedge against mega cap technology stocks and AI. Well, not so much. In fact, Bitcoin has correlated strongly to the software sector.
My point is not that I dislike the asset class; I do like it. Crypto is a great trading sector. My point is that people who drank the Kool-Aid behave like those who bit on the Dotcom Bubble and the AI melt up and the precious metals trade. They only see one direction. They don’t understand the risk associated and end up with the largest position right at the peak, often with borrowed money. Then they either panic sell or the brokerage firms force sell for them. The anecdotes I have heard from folks who say they will “never sell Bitcoin” or they are “holding silver forever” make your head shake.
Back to the events of Q4, the world remained unsettled. Some would say crazy. The truth is that you could have labeled the world the same way over just about any quarter since 2000. And no, it’s not because things have become more insane. It’s because the flow of information is real-time, at warp speed and in our face 24/7 with those horrible inventions called smartphones. People mostly stopped talking about Ukraine although little has changed for Ukrainians. There was a ceasefire in Gaza, but it was tenuous at best.
Off-term elections in VA, NJ and NC saw democrats score big victories in heavily red areas, similar to what republicans scored in 2021. That momentum did not last into the 2022 midterms. A Hanukah massacre in Australia continued to highlight the violence in the world. The last penny was put into circulation, and the LA Dodgers won the World Series, the latter being painful for Yankees fans. The on again, off again release of the Epstein files continued. I, for one, would rather that every single file be released with only the names of the victims redacted.
Turning to financial events, Tesla shareholders approved a compensation package for Elon Musk that could potentially be worth a jaw-dropping $1 trillion. I remember the previous one into the billions and I laughed that there was zero chance Musk could earn that. Now, I won’t be so cavalier. Preliminary trade deals with Asian countries like Malaysia, Cambodia, Thailand and China were all made, a huge win for the American economy and consumer. However, the administration’s tariff policy continued with the on again, off again nonsense. While I accept that the budget deficit has been significantly reduced, I still do not believe that tariffs are the answer for any capitalistic country.
In spite of all the supposed “uncertainty”, the economy continued to surprise to the upside, jumping 4.3% in Q3. People were surprised but shouldn’t have been. The One Big Beautiful Bill from July 2025 provided juice and stimulus to the economy in terms of sweeping deregulation as well as massive tax refunds, the latter of which should be seen in April, May and June.
Everyone’s favorite bogeyman, inflation, continued to trend lower which has been my theme since 2023. Please remember that inflation at 0% does not fix the high cost of living. It just means that prices are not going up anymore. Long-term inflation averages just above 3%. What Americans “feel” is that grocery and dining prices are at all-time highs not that inflation is surging. And the only way that prices will come down is during a recession which I don’t think anyone is rooting for.
Elsewhere in the economy, corporate earnings remained very strong and continued to exceed expectations. Employment remained weaker from the prior year, but not weak overall. Whether this was from strengthening the border or AI is yet to be determined. We just know that something changed significantly, besides government hiring declining. The economic issue in Q4 was the longest government shutdown ever. That is going to significantly distort economic data.
All of this led Jay Powell and the Federal Reserve to cut interest rates by ¼% in October and December with more to come. It was fascinating to watch a divided FOMC hem and haw about rates with some members wanting no cuts and some wanting deeper cuts. As 2026 ended it seemed as though Jay Powell had seen his last rate cut and the next Fed chair would need to build consensus for that.
Speaking of new Fed chairs, there were three potential candidates being bandied about, Kevin Hassett, Kevin Warsh and Rick Rieder. Despite what the prediction markets say, I would bet heavily against Rieder. It should definitely be one of the Kevins with the former being much more loyal to President Trump than the latter.
And while on the subject of presidents, I will repeat what I say every quarter and many other times. For folks who invest based on geopolitics, you will never succeed. It is a loser’s game. Every single president has presided over all-time highs in the stock market since Ronald Reagan. Let that sink in. You can love or hate any president you want, but it just doesn’t matter that much in terms of the economy and corporate earnings. The Fed is ten times more influential and important.
Finally, before we move to the middle of the report, the term “bubble” was used an historically high number of times in Q4. If I had a nickel for every time I heard a pundit say “bubble”, well, I would have an awful lot of nickels. As I have often said, bubbles are generational and widespread. Lazy pundits use the word for any asset that has a parabolic advance. And we know that parabolic rallies almost always end poorly, but they are not bubbles.
Dotcom was a bubble. Ownership was sweeping and widespread. People kept referring to analysis back then as a new paradigm. They told us to use eyeballs over earnings. And not to worry about companies without revenue, let alone without earnings. We all know how that worked out. It wasn’t just a few quarter 50% decline. It was complete and utter devastation. Most stocks went down 70%+ and few survived long-term. There were no bubbles in 2025.
At this point in the report, I usually write about my barbell strategy for investing. If you picture a barbell from the gym, there is a long, thin bar with big weights on both ends. Think of those weights as our conservative strategies and aggressive ones, the exact proportions do not matter yet. In theory, your money would have higher weights to conservative and aggressive strategies, especially if you are in or very close to retirement, and lower allocations to the middle of the road strategies.
This barbell approach has also worked very well with monies being transferred in from 401K and 403b plans as those pre-packaged plans rely heavily on bonds for the more conservative approach and do not account for interest rates rising. Additionally, their aggressive choices do not usually reward the risk taken. If you would like to learn more about the barbell approach, we can set up a meeting, call, or Zoom.
Every now and then clients and prospective clients ask me where I invest my own money. As you know I am a huge proponent of eating one’s cooking. In other words, if I have high conviction in our strategies to recommend that clients invest, I should have the same conviction with my own money. I have 95%+ of my investable assets as well as my family’s in our strategies.
Within our strategies, I have always been an aggressive investor, and I have trained my family to follow suit. That’s my personal objective and risk tolerance. As such, I have the vast majority of our money in our various aggressive strategies. I also have very small pieces in a number of other strategies that do not fall into the aggressive category. When our strategies perform poorly for a month or quarter, which they have and will again in the future, I try to add money to those.
The economy should continue to surprise to the upside as Q4 GDP is released in early Q1 2026. The only thing I am having trouble accounting for is the government shutdown which creates distortion and noise. I expect inflation to remain under 3% and the jobs market to trough and accelerate in Q1. We still don’t know if AI or lower immigration caused the soft patch. Regardless, a massive wave of deregulation from the One Big Beautiful Bill has started and that is likely to carry the economy well into 2026 where the next big election takes place. Additionally, another stimulus will come as large scale tax refund checks hit in the spring.
A new Fed chair is coming, and his name is likely to be Kevin. Kevin will be confirmed, mostly on partisan lines with a few crossovers and with immense pressure from Donald Trump to further cut interest rates which I believe he will do later in 2026. Ultimately, however, I believe that Kevin will disappoint the president and keep rates stable when Trump wants them even lower.
Turning to the financial markets, while I began my research forecasting a -5% to +8% year for stocks, I upgraded that to +12-14% after a number of studies mitigated what is traditionally a poor year, midterm election years. These years with a second term president were all reasonably strong in 1986, 1998, 2006 and 2014. Additionally, after three straight up years, the fourth year has been higher 8 out of 11 times.
My thesis for Q1 goes like this. January should be strong as should the quarter. There should be a mid-quarter 3-5% pullback. I am still looking for a stock market peak in Q2 that leads to a 10-15% correction in Q3, followed by a strong Q4. Bears are hanging their hats on things like the Shiller PE at its second highest level ever as well as Warren Buffet’s stock market value to GDP being strongly overvalued. These are indisputable facts. However, they are terrible at timing. Valuation traps can last quarters or many years. It took four years for valuation to matter in the Dotcom era.
There has been a major broadening of the bull market since last summer. I expect that to continue not at the expense of technology, but in addition to it. Similar to what I wrote a year ago, I do not believe mega cap tech will be gangbusters this year. I think the best case is that the sector performs in line with other sectors. However, make no mistake about it; the bull stock market cannot continue without technology. It has way too large of a weighting. The market needs tech.
The bond market remains in a trading range which has nothing to do with what the Fed does or does not do. Long-term rates are set by the markets, and the Fed “usually” follows them. I think yields on the 10-Year should be in a range between 4% and 4.5%. One of my long-term concerns is that the Fed cuts and cuts short-term rates, but long-term rates go up. That will be fine if it’s slow and does not exceed 5% too much. If it’s quick and breaches 5%, that could be a “Houston, we have a problem” moment.
Besides long-term rates on the list of things that keep me up at night, folks have asked about inflation and Venezuela. I remain firm on what I said in January 2023. Rising inflation is as dead as the New York Jets’ football team. I am not and have not been one bit concerned, at least not until the other side of the next recession. Regarding Venezuela, it’s a non-event, just like when the US bombed Iran. They don’t factor into my models. There is no data to analyze. Successful investors do not worry about the ever-long list of geopolitical nonsense. And you know I certainly do not.
Gold and silver remain parabolic and should punish the bulls in Q1. Whether that’s the end of their bull markets or just corrective action will have to be analyzed. One thing is for sure. The easy money has been money. Three months ago, I suggested that crude oil should test the mid $50s before finding a floor. $55 was the bottom and crude should rally in Q1 into the $60s. Much higher will take work. The U.S. dollar has been moving sideways since July. I think any breach of those lows is a buying opportunity for what should be a positive quarter and six months. Three months ago, I forecast that Bitcoin would peak below $130,000 with a soft floor below $106,000. The peak was spot on, but the market knifed through all floors and is on its way to my downside target of a 50-70% crash, sooner than later where I will be frothing at the mouth to buy.
Finally, please remember some of the opportunities at hand. We will do our best to harvest tax losses in taxable accounts. If you have IRAs, you should strongly consider ROTH conversions with the goal of having as much as possible in ROTHs during retirement. ROTHs are the single best account structure ever invented and far too few people take advantage of them. And I equally love ROTH 401Ks for your employer sponsored plan, especially for folks under the age of 50.
Updating your retirement projections is an invaluable tool, especially during periods of market weakness. Remember, we account for 10% declines, 20% declines and multi-year-bear markets in our projections. Stock market declines reinforce our projection process. It is those projections that matter most over the long-term, not the day-to-day market volatility which causes discomfort for so many investors.
Please remember that while I publish regularly on the blog and speak freely in the media, our non-emotional, quantitative models dictate how each strategy invests, not my personal feelings or opinions. It is sometimes difficult when one group of models reduces exposure while another group remains in full steam ahead mode. I just keep my head down and follow what we built as best I can.
Please continue to share your feedback, positive and negative. Investing is a marathon not a sprint and the long-term future continues to look very, very bright. We look forward to sharing that with you over the coming years. Remember, I am always interested in meeting, whether it is to create or update retirement projections on your financial situation, review the strategies in your portfolio, run social security analysis’ on when and how to file for the best benefit, discuss your estate or even smaller transactional-type issues like securing a mortgage or weighing insurance. Again, here is the link to my calendar to schedule a meeting in the office, call, Zoom meeting. https://schedulewithpaul.as.me/
Thank you for the privilege of serving as your investment adviser!
Sincerely,
Heritage Capital, LLC
Paul Schatz AIF®
President
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