Likeliness of Likelihood

2025 In Review

Financial markets started 2025 with some turbulence, but ended the year flying high again. Asset classes were positive across the board. Global stock market prices were up over +21% for the year. The U.S. bond market also advanced, with prices up about +3%. The biggest gainer, for a second year, was gold. Price shot up more than +61% in 2025!

Global Markets 2025

Despite another banner year, there was a notable change in market leadership for 2025. For the first time in many years, non-U.S. equity markets outpaced the U.S. That worked in our favor.

In last year's Investor Letter, I wrote about the increasing valuation disparity between U.S. and foreign equity markets. I also presented my case for overweighting non-U.S. equities, emerging markets (EM) in particular.

As luck would have it, EM was the best performing region in 2025. I emphasize luck, because market timing is fickle and unpredictable. I did not know when EM would outperform. A rotation into EM simply seemed rational and reasonable based on available data.

I also wrote about potential value in the U.S. commercial real estate market. There were signs of a burgeoning recovery in 2025, but nothing definitive. Macro risks and shocks could still derail any rebound. Still, prices remain off their post-pandemic lows. Barring a recession, I continue to see relative value and opportunities in commercial RE.

Likeliness of Likelihood

As rational investors, we recognize investing is inherently risky. There are no real guarantees. We find ourselves weighing imperfect odds and likelihoods. The best we can be is "approximately right."

Perhaps, now more than ever, because the investing outlook is getting increasingly obscure. Last year, we could still identify clear favorites in terms of relative and even absolute value. But after another year of strong performance across asset classes, clear favorites are harder to find.

Forced to choose, non-U.S. equity markets are still valued favorably relative to the U.S. If for no other reason than increasingly expensive stock prices in the U.S. Consider the Market Cap to GDP ratio (aka the "Buffett Indicator"). The ratio is the value of Total Stock Market Capitalization divided by the value of Gross Domestic Product (MC/GDP), shown below as the blue line.

The higher the ratio is, the more expensive the stock market is (ceteris paribus), and vice versa. The long-term average level of MC/GDP is around 0.8. Expectations based on historical trend would place fair value somewhere near 1.0.

Currently, MC/GDP is close to 2.3. Not only is that the highest level on record, but it's more than two standard deviations above "normal" expectations. That means the U.S. stock market is more expensive now than at the peak of the Dot-Com or Housing Bubbles.

Does that mean we are in the biggest bubble of all time? Probably, but even so, nobody knows when it will bust. The Great Financial Crisis took years to blow up, as did the Dot Com Bubble, and as did every one before that.

And of course, I could always be wrong! Particularly when it comes to market timing, there are no certainties, and ultimately we are all just playing with the likeliness of likelihood.

Rather than speculate on the intricacies of impossible timing, it is more practical to focus on the big picture of observable economic conditions. For over two years, I have written about the importance of employment conditions, and how a strong jobs market helped keep the U.S. out of recession.

After the rebound from COVID shutdowns, U.S. job growth was remarkable. Month after month of 300k, 500k, even 800k+ new jobs created. Despite all the doom and gloom that persisted post-COVID, it was simply unlikely for recession to take hold while employment remained so strong.

It took a couple of years, but it looks like employment conditions are finally showing signs of fatigue. The chart below shows the net number of jobs created per month (aka Total Non-Farm Payrolls) as reported by the Bureau of Labor Statistics.

Not only is there a clear downward trend since 2021, but there were several months of negative job creation in the second half of 2025. This is the first sign of such weakness in the post COVID period.

Cyclical sectors like manufacturing have been signaling contraction long before employment. The chart below shows the ISM Manufacturing PMI, which gauges manufacturing sector conditions. Readings below 50 reflect contraction, and the index has been stuck below that level for most of the past two years.

ISM Manufacturing PMI

To complete a trifecta of recessionary omens, there is the trusty Treasury Yield curve, shown below. The Fed's rate cuts this year have finally brought short term rates back below long-term rates, ending inversion, and normalizing the curve.

While some celebrate the move, I wrote before that recessions typically don't happen until the yield curve reverts. After the longest yield curve inversion in history, we are now past the point of reversion.

As ominous as all that sounds, remember that investing is never certain or easy. Again, I could always be wrong. Case in point, we could cherry-pick indicators to present a case for expansion. For example, recent strength in New Home Sales, or resilience in the Services component of ISM readings do not suggest contraction.

The Likely Bottom Line

If you're reaching the end of this letter with a feeling of uncertainty, then I think I got my point across. The investment outlook is indeed more obscure and murky heading into 2026 than it has been in many years.

With uncertainty high, we have moved from a position of balance last year, to one of increasing, calculated caution this year. Headed into 2026, our Macro Allocation portfolios are positioned with an underweight of risk exposure.

Within equities, we remain underweight U.S. stocks relative to foreign markets. Our most meaningful equity overweight is in Emerging Markets. Within fixed income, we reduced our short-term fixed income holdings, and increased our average duration with a focus on government and investment grade bonds.

As a result, bonds are our largest overweight at present. That may sound crazy to investors engulfed in AI and "Mag 7" stocks. With stocks on fire, why would anyone want boring bonds? Well, that widespread lack of interest itself provides a contrarian reason.

Remember in 2022 when investors were crying about the near-zero rates on fixed income? Now that bond yields are respectable, and bond prices look reasonable, nobody is interested. Yet, investors pile into U.S. stocks at sky-high prices. That sounds just as crazy to me.

In addition, we maintain a modest allocation to gold. While gold helped our performance in 2025, return was not the intended purpose. Rather, we hold it as a ballast against market uncertainty, which we continue to see rising in the year ahead.

The moves and positions are not extreme, but they are likely the right ones, given the rising unlikelihood that the U.S. can continue to evade a recession. Ultimately, what we do next will depend on how economic and market conditions change, which only time will tell.

To that end, we continue to wait patiently, watch carefully, and stay ready to make adjustments as changes come. We will keep you updated with what we see and do along the way.

In closing, I would like to thank all our clients, families, friends for another great year at BCM. We would not be here if it were not for your continued support. Thank you for your allowing us to continue earning your trust and confidence. We look forward to continuing doing so in the years ahead!

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Victor K. Lai, CFA