2025 in Review: How are we Doing?

“I wish people would stop predicting planes will fall out of the sky.”
-Jane Garvey (former FAA Chief) regarding claims airplanes would fall out of the sky during the beginning of the year 2000

Another lap around the Sun has put us 25 years past the year 2000, the infamous Y2K. Did you have a friend, family member, or associate who exuberantly prepared for an apocalyptic Y2K? I had all of the above. Despite all of the fears, and thanks to the hard work of many, it turns out our systems generally had little trouble going from 1999 to 2000, andairplanes were able to fly into the New Year, as well.

The year 2025 started with many fearful people too. A new president. New tariffs. Uncertain inflation. In contrast to Y2K where the focus was to store up and shelter in place, some people discussed “escaping,” even to another country. For those of us that stayed, how are we doing?

Inflation

I’ll start with inflation, as this is often one of the most tangible fears since we experience its effects daily. We also recently (2022) hit the highest inflation rate we have had in over 40 years, so the fear is understandable. Over the past five years some items such as eggs grew over 150% in price, whereas other items like wine (or alcohol more broadly) grew moreslowly than overall inflation. The below chart reports these results:

Besides the take-away to bravely battle inflation by doing things like drinking more wine and buying some Rhode Island Reds (chickens), it is also clear that inflation has now fallen dramatically. It seems inflation is ticking along at a bit under 3%, although greater than the Federal Reserve’s stated target of 2%, this rate is just under my long-run assumed inflation of 3%. So how are we doing when it comes to inflation? We are doing ok.

Tariffs

Tariffs went up, down, paused, and up, and then down a bit. And then up a touch more. That was the last time Trump was in office. What happened to inflation and stocks during that time? Inflation was little affected, whereas stocks at first fell in fear and then recovered to new highs. The below chart I made for an earlier commentary shows this.

If the above sounds familiar, it is. However, this time things have happened much faster. I created a chart with the same data as above but added the equally weighted SP500 index (proxied by RSP). I also measured tariffs using more frequent data. The general story is the same as the first time, albeit all within a year rather than over 4 years: tariffs go up, stocksfall, and then recover to new highs while inflation remains benign.

So, since tariffs have, overall, gone up (more than doubled in effective terms), how are we doing? We are doing ok.

Government Shutdown

During 2025 we also got to experience the longest government shutdown in US history—43 days. In terms of economic impact, Reuters estimated a $14 billion impact on our $30 trillion dollar economy. In absolute terms that’s a meaningful number but in relative terms it’s like losing change in the couch. This shutdown shifted the mainline economic growthforecast of 2% down to 1.99%. Nonetheless, the shutdown did have meaningful impacts.

One such area was the ceasing of important economic data. Happily, economists have developed many clever ways to track the economy without the government. For example, to track consumers economists can obtain data on detailed credit card spending and satellite imagery of Walmart parking lots vis-à-vis prior periods. These methods work pretty well.

One of the most important metrics—job data—can also be created from sources such as Indeed and other recruiting applications. Below is a comparison of a traditional government report on labor movement (JOLTS) to two of these alternative sources of data (Indeed and LinkUp) across time:

As can be seen, the independent data sources can reasonably be used to fill the void created by missing government data. So, after weathering the longest government shutdown in history how are doing? We are doing ok.

Artificial Intelligence (AI)

A final area we continued to hear much about in 2025 was AI.1 Although there is much excitement about the potential of integrating different types of AI, as we have actually been doing in different forms for decades, into our companies and lives, the adoptions of some “new” AI has been a bit slower than expected. The below chart from Goldman Sachs reports data obtained from interviewing their banking clients. In short, while about 1⁄2 of the firms feel progress is in line with expectations regarding using AI, about 41% have had less progress than hoped, while 8% said they have made more progress than expected.

Besides adoption being, overall, a bit slower than anticipated, AI has not materially eliminated jobs as some had feared. In the same survey Goldman Sachs found 11% had reduced head count, whereas 89% had no change due to AI. Instead of using AI to replace jobs, at least so far, it’s been largely used to increase the productivity of workers.

Whatever the progress, most clients want to have some exposure to the hoped-for AI boom. Funnily enough, most already have substantial exposure to AI. For example, currently some 40% of the S&P 500’s total market capitalization consists of so-called AI companies. This is not entirely surprising when accounting for the fact that virtually all of the big brand name technology companies are significantly participating in the AI rush. In addition, exposure to small companies and private companies, for those with private equity, provides additional AI opportunity. So how are we doing in this AI rush? For this one I asked Chat GPT and it told me “we are doing ok.” And we really are doing ok.

The Future

There was a lot to worry about starting in 2025. However, in the end, 2025 proved to be an even better than typical year for most financial markets. So, what’s going to happen in 2026? For this hard question, I’ll answer with a famous(ish) quote:

“Typically, we don’t know what we don’t know, but we often do know what we do know.”

-Professor Dylan Blu Minor

If that sounds like our States of the World® approach, it’s because it is exactly that! We don’t know what’s going to happen this year. However, we know exactly what’s going to happen in 2026. For example, I do know what will happen to US stock prices by the end of the year: they will be up, down, or flat. Thus, one key is to position disparate assets, so we are not overly reliant on any particular US stock or economic factor outcome. A second key is to craft consistent portfolio cash flow. For a typical Omega portfolio, you might currently enjoy 3% or even 4% per annum in cash flow from current interest and dividends. Although cash flows change over time, they are relatively consistent. This means if tariffs go up, go

down or don’t change, you’ll still enjoy an attractive cash flow. A third key is to look forward to financial market corrections. Every few years, for example, US stocks tend to fall more than 20%. The last time we had a drop like that was in 2022. Another drop is surely coming, either this year or later. These drops provide an opportunity to improve asset positioning and tax harvest, for example. Ironically, in the long one, assuming a clever mix of disparate assets, you’ll have more return, lower risk, and less taxes with increased asset volatility.

This all reminds me of the first time I witnessed my wife pruning our roses. In my naiveté I asked her what the [explicative] she had done to our (formerly) beautiful bushes. In kindness and patience, she explained the importance of pruning these plants to the point of an apparent rose apocalypse. As is usually the case, she was right. That Spring they sprung even more gloriously than in years’ past.

So too a pruning is coming to the financial markets. Perhaps it will be this year or quite sometime after. Whatever the case, we will be ready to use it to make your portfolio and overall strategic financial plan even better. Meanwhile, whether at the Santa Barbara Mission or your favorite botanical garden just about now is the perfect time to see those pruned roses and marvel at what is to come, knowing quite well that they are doing ok…

1. Here I spell out AI as artificial intelligence since in some fields AI has a very different meaning. For example, in the field of farming, AI means artificial insemination. This created a lot of confusion for me in a recent conversation with my farmer brother-in-law regarding growing his Highland cow herd. While AI of all types can be very exciting, so are Highland cows (or “hee-land kittle” as a Scottish client pronounces them). I am delighted to have just gotten two Highland cattle, named John and Wayne.