Market Insight

As we look back on 2025, one theme stands out more clearly than any other: uncertainty became the norm. For decades, investors have been told that markets hate uncertainty. Historically, that has been true. Sudden, unexpected events tend to create volatility as markets struggle to price the unknown. What made 2025 different is that uncertainty was not episodic. It was persistent. Headlines surrounding tariffs, interest rates, geopolitics, elections, and technology arrived almost daily. Rather than a single shock, investors were asked to digest a constant stream of new information.

With all the uncertainty in the world, many investors are asking a fair question: Why is the market at all-time highs? So far this year, the S&P 500 has notched more than 30 record closes, an impressive run, especially considering the backdrop of sticky inflation, trade tensions, and a government shutdown. Historically, markets have hated uncertainty more than anything, yet this year has been a reminder that they can often look past it when the underlying story is one of strength.

Too often, individual investors have approached markets like emotional day trippers – hopping on and off at the worst possible stops. According to research by Dalbar, over the past 30 years the average stock investor has underperformed the market (S&P 500) by nearly 3% per year. The average bond investor fared even worse. The study points to behavior, not investment selection, as the primary culprit. Simply put, fear often causes investors to “sell low” while greed temps them to “buy high”.

The relationship between risk and reward forms the foundation of financial markets and capitalism. It’s widely understood that achieving greater returns requires taking on greater risk. In investing, risk is defined as the uncertainty of outcomes. While some types of risk can be mitigated through diversification, achieving competitive long-term rates of return requires taking some risk.

Investors were eager to put 2022 behind them as the clock struck midnight on December 31. After all, it was the worst year for stocks since 2008 and the worst year for bonds - ever. Yet, there was little cause for optimism as it seemed, and still does, that 2023 would not offer a reprieve from the challenges that faced the economy and financial markets last year. Namely - inflation, rising interest rates, and a looming recession. Add to that mix the largest bank failure since 2008, and one would assume that the losses would have extended through this year’s first three months. However, in the world of financial markets, sometimes bad news is good news.

If you’ve ever tried to lose weight, you know the phrase: “The last five pounds are the hardest.” The first few pounds often melt away with relative ease, but shedding those final stubborn few requires effort, discipline, and time. And, sometimes, there are setbacks. Jerome Powell and the Federal Reserve's battle with inflation has reached those stubborn “last five pounds.” While there is still some work to do to hit their 2% target, after peaking over 9% in June 2022, inflation now hovers below 3%, thanks to the easing of supply chains and the Fed’s efforts. Inflation can wreak havoc on an economy and financial markets, so keeping it under control is vital – which is why it is part of the Fed’s dual mandate, alongside promoting full employment.