by Nathan White, CIO
As we enter 2026, the investment landscape remains constructive, though increasingly nuanced. Our outlook is broadly bullish, grounded less in traditional valuation comfort and more in the sheer scale of global liquidity being injected through fiscal expansion and accommodative monetary policy. History shows that when liquidity is abundant, economic cycles can run hotter—and longer—than many expect. We believe the economy is likely to continue expanding through 2026, even as underlying imbalances slowly build beneath the surface.
Fiscal policy remains a powerful tailwind. Persistent government spending, industrial policy initiatives, and election-driven incentives are supporting demand well beyond what private-sector fundamentals alone would dictate. At the same time, central banks, while publicly cautious, are increasingly constrained by financial stability considerations. Liquidity operations, balance-sheet flexibility, and a tolerance for inflation modestly above prior targets all point to monetary conditions that remain supportive of risk assets. This combination creates an environment where growth can persist despite elevated prices and tighter headline policy rates.
Equity markets have responded accordingly. While overall market valuations appear stretched—particularly within the largest and most heavily owned companies, this has masked a meaningful broadening beneath the surface. Concentration risk remains a valid concern, but it is no longer the whole story. Outside of the most crowded large-cap names, we continue to find more reasonable valuations across mid-cap, small-cap, and selectively chosen international equities. These areas offer attractive opportunities where fundamentals, cash flows, and balance-sheet strength are not yet fully reflected in prices.
From a portfolio construction standpoint, this argues for participation rather than retreat—but with discipline. Liquidity-driven markets tend to reward investors who remain invested while punishing those who attempt to time exits too early. At the same time, such environments can foster excess, mispricing, and periodic volatility. Corrections should be expected, not feared. In fact, they often create opportunities to redeploy capital into higher-quality assets at better entry points.
Fixed income presents a different challenge. Credit spreads remain tight, signaling limited compensation for assuming incremental risk. While yields are more attractive than in prior years, this is not a backdrop that justifies aggressive risk-taking in lower-quality bonds. Our approach continues to emphasize capital preservation, diversification, and patience—adding risk only when market stress creates genuine opportunity.
Looking ahead, the primary risk is not an imminent recession but rather economic “indigestion” from prolonged stimulus. Inflation persistence, policy missteps, or a sudden withdrawal of liquidity could shift the regime more abruptly than expected. This is why our investment process remains firmly model-driven, combining fundamental analysis with quantitative risk management to adapt as conditions evolve.
In short, 2026 is likely to reward prudent optimism. We remain constructive on growth and risk assets, selective about where valuations still make sense, and disciplined in managing downside risks. By balancing participation with preparation, we aim to navigate a market that may continue to run hot—while staying ready for when the cycle eventually cools.
Model Portfolio Performance and Positioning
The Managed Income model was up 4.58% for the year. The allocation remains balanced to capture income, minimize volatility and reduce risk. Inflation has moderated from the highs but is very sticky at current levels around 2.5% to 3%. Expect price levels to remain high without a serious economic slowdown. Regarding interest rates, the market is expecting one or two more quarter point rate cuts for 2026. Like any presidential administration, Trump is pushing hard for lower rates and a new compliant Fed president but many of the voting members of the Fed board are reticent to lower rates if inflation remains elevated. Elsewhere in the fixed-income space, the spread between safe securities and corporate and/or high yield fixed income remains narrow and near historical lows. These spreads are a primary indicator of stress in the real economy, and an important bell whether that I monitor closely. As I mentioned last quarter, now is still not the time to increase risk when spreads are so narrow. Managed Income will remain focused on protecting capital and will primarily only add risk when conditions get extreme (i.e., recessions).
Our equity and growth strategies performed well for the year compared to relevant benchmarks. By way of comparison, the S&P 500 was up 17.9%, the Dow Jones Industrial Average 13%, the NASDAQ is up 20.3% and the Russell 2000 (Small Caps) is up 12.8%.
Fundamental 20 is up 15.8% for the year. Due to its value focus this was a little behind the more growth-oriented indexes for the year. This strategy focuses on highly profitable companies that have excellent value compared to their cash flows and/or net income. We are looking for companies that are using their capital efficiently to make money. The changes made during the fourth quarter include adding Biomarin Pharmaceutical (Biotechnology), Birkenstock (Textiles, Apparel & Luxury Goods), Global Payments (Financial Services), Halozyme Therapeutics (Biotechnology), Flowserve (Machinery), and Citizens Financial Group (Banks). There are pending changes to be made during the new year as market conditions dictate.
The Fast Movers strategy was up 23.6% for the year and was our best performing subset strategy. This is our most aggressive strategy that actively seeks high growth and therefore can experience regular large drawdowns. The strategy performed well due to exposure to the AI theme from selected MAG 7 stocks and separate software and semiconductor stocks. The strategy now holds nine technology positions, five consumer discretionary, four communication services, one healthcare, and one industrial position. There are several pending changes that will be made to concentrate the model as the new year begins to align with our more updated rankings.
The Liquidity Factor Strategy is up 11.8% for the year. This strategy uses a proprietary method to take advantage of pricing anomalies in stocks that are less liquid and relatively ignored by the market. The strategy is comprised of ten holdings that see little turnover. There was one change made during the quarter via selling Regeneron Pharmaceuticals and adding Roper Technologies. After being one of the strongest strategies for the year through the first three quarters it took a beating in the fourth quarter with December being particularly tough. The primary exposure is in the Consumer Discretionary followed by Information Technology, Healthcare, and Industrials. The Relative Strength ETF component of our Top Flight model was up about 12% for the year. Small caps finally had an exceptionally good quarter after severally lagging all year. The strategy remains allocated to ETFs representing Small Caps and Dow Jones Industrials Index of thirty stocks but may add exposure to emerging markets during the fourth quarter.
The Top Flight Model Portfolio was up at 15.6% for the year. Compared to our benchmarks, it outperformed the Dow Jones Industrial Average and the Russell 2000 (i.e., small caps) and was behind the S&P 500 and the NASDAQ composite. Our equity screens are now seeing increasing movement and due to the rally in stocks from the tariff volatility earlier in the year. We did not make any dramatic moves during that chaotic period and surmised it would be better to hold steady, which in hindsight was the correct mover to have made. Top Flight is now comprised of 25% Fast Movers, 40-50% Fundamental 20, 10-20% Liquidity Factor, and 15% ETF RS. Among our overall equity holdings, the top five performers for the fourth quarter were FlowServe (+41%), Regeneron Pharmaceuticals (+29%), Alphabet/Google (+29%), Intuitive Surgical (+27%), and Merck (+26%). The worst performers were Strategy Inc (-25%), Netflix (-22%), Autozone (-21%), Axon Enterprises (-21%) and DoorDash (-17%).