Bad Start, Happy Ending

2025 was barely underway when the Chinese artificial intelligence startup DeepSeek shocked the technology universe with the introduction of its R1 reasoning model. This low-cost AI system provoked a “Sputnik Moment” for investors, who feared the US could be surpassed by China in the race for AI dominance. Leading US technology stocks fell by 10-20% on January 27, the first trading day after the announcement. Just three weeks later, on February 19, the US stock market began a 19% slide that bottomed on April 8, a week after the “Liberation Day” tariff announcements. As it turned out, America’s technology leaders were not eclipsed by China (at least not yet) and the Trump Administration, chastened by market fallout, dialed back its tariff initiative. The economy kept growing and corporate profitability remained strong. The financial markets rebounded from a rocky start, rewarding patient investors with solid performance for both stocks and bonds.

Forecasting Season

It wouldn’t be a new year without stock market forecasts. Bartlett has long regarded these seasonal predictions with skepticism, mindful of so many swing factors beyond the intuition of the best and brightest analysts. After all, just a year ago, no forecaster was anticipating DeepSeek or Liberation Day. Only a few forecasters expected a third consecutive year of high stock market returns. Hardly anyone predicted that foreign stock markets would outperform American equity benchmarks. This recalls John Kenneth Galbraith’s pithy description of two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.

It is with humility rather than insouciance that Bartlett offers just a single, simple prediction about 2026: the year will evolve in surprising ways for investors. It will be vexing at times, possibly scary for a while, and will probably include a few market setbacks. In other words, it will be like most years. We will, as ever, stay focused on long-term goals, watching for buying opportunities created by distress.

Principles Instead of Predictions

Bartlett was not despondent last April, and not exultant in December. We know a methodical approach, grounded in realism rather than optimism or pessimism, is the best way to achieve your goals. The start of a new year is a good time to restate our guiding principles. These should keep us composed and pragmatic in 2026.

Investing is a marathon, not a sprint

The stock market setback in early 2025, a shakeout in 2023 following a few bank failures, and a selloff in 2022 amid an inflation surge, remind us that occasional distress should be expected. Despite periodic scares, owning great companies has been a proven winner, amply rewarding the fortitude of long-term investors.

“Time in the market” matters more than “market timing”

Occasional turbulence makes “market timing” seductive for many investors. However, it is unreliable because the timer usually sells when declines are underway and repurchases later when prices are higher. Many reputable studies have demonstrated the costly futility of timing. Wealth is built by owning, not by trading.

Volatility should be your ally rather than your enemy

Because turbulence is inevitable, a disciplined investor should follow policies that position them to benefit from turmoil, rather than be threatened by it. By establishing appropriate asset allocation targets and rebalancing as market conditions evolve, the investor can avoid the costly behavioral penalties incurred from selling at low prices during market declines or buying at high prices when optimism is abundant.

Be prudently diversified

We think this is a timely reminder. In recent years, stock market performance has been dominated by a small cohort of companies in just one sector (technology). Such concentrated market conditions can tempt investors to “chase performance” by focusing too much on exalted winners. This usually ends in sorrow.

Be careful about investment valuation

Prolonged good times can encourage complacency and speculative excesses. We see this today with the outlandish valuation of some newer AI companies with unproven business models. It takes a 25% gain to be fully restored after a 20% decline, but a 150% rebound is needed to recover from a 60% decline. We think this latter penance is likely for those who are now too credulous.

Don’t forget the safeguards

Less volatile securities – bonds, cash, and select alternatives – may seem restraining in good times when the stock market is rising. But they are vital safeguards, especially for those who need portfolio distributions. By maintaining appropriate precautions, occasional market setbacks can be met with equanimity, seen as periods of opportunity rather than peril. 

Discipline is the key to success over the long haul. Churchill’s memorable saying from World War II can be an inspiration for investors: “We cannot guarantee success. We can do better. We can deserve it.”

Good News

We are pleased to announce the addition of Melissa Mabley Martin, CFP®, CDFA® and Justin M. Ellis, CFA®, CFP® as Principals of Bartlett. Melissa and Justin are thriving as Wealth Advisors, and their elevation is an example of the careful succession planning that is vital for Bartlett’s future.

Concluding Comments

We are grateful for your loyalty and trust, manifested in another year of high client retention, exceeding 97%. We look forward to helping you navigate the future with confidence, no matter what challenges are presented in 2026. Please recommend us to family, friends, and associates who could benefit from our fiduciary services. Also mention Bartlett if you meet a talented CFP® or CFA® who is looking for a great place to make a career.

DISCLOSURE

This material provided by Bartlett Wealth Management (“Bartlett”) is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Nothing in these materials is intended to serve as personalized tax and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Past performance is not a guarantee of future results. Opinions expressed by Bartlett are based on economic or market conditions at the time this material was written; actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Bartlett, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Any reference to an index is included for illustrative purposes only.  Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.