Newsletter

Economy, Stocks and Bonds

January 2026

This coming year is expected to be eventful following on significant geopolitical changes that have transpired over the past few years. We have seen a decisive return to great power competition as the era of globalization that has characterized recent decades has come to an end. This has profound implications for economies and markets throughout the world.

The economy has been sending mixed messages over the past year, although most of them skew toward pointing to a more robust health than most analysts have expected. While demand outlook metrics have been poor, actual demand reports and GDP have shown remarkable resilience. This raises the question of whether the Federal Reserve is on the right track with lowering the Fed Funds Rate to the level it has, let alone adding more cuts this year. Inflation metrics have remained stubbornly high, and this complicates matters for the policy maker. The risk is that continued easy monetary policy could lead to an entrenched higher long-term inflation outlook on the part of investors, which ultimately leads to higher long-term rates, not lower ones.

This is illustrated by the fact that Treasury yields for paper maturing 3 years and further out are higher than they were on September 17th last year, the day before the Fed began its most recent cutting cycle. Putting this into perspective, the overnight rate has gone down by 75 basis points since that time, and the 10-year Treasury has climbed 9 basis points higher. This represents a return to the yield curve’s normal behavior over most of history. This makes sense, as inflation expectations are the only substantial factor in calculating the yield an investor demands in lending money to the government, since a US default is assumed to be an extremely improbable, if not impossible event. Corporate bonds have increased by slightly more on the long end of the curve, largely because corporate bonds contain a default risk premium in their pricing. The larger increase suggests that investors view default risks to be climbing, although the overall spread between investment grade bonds and Treasuries remains very low by historical standards.

We ended 2025 with a solid annual climb of 16.4% in the S&P 500 Index, despite three notable periods of volatility and drawdown during the year. In February, we had a correction of ~10%, followed by one of ~16% in late March/early April, and a November pullback of ~5.6%. Nevertheless, the market is trading at all-time highs. The increase in volatility can be attributed to increasing uncertainty in the geopolitical environment, concerns about persistent inflation, and increasing pressure both corporate margins and sales. But the old adage “the market climbs a wall of worry” holds true. We have noted that market leadership seems to be shifting away from Technology in spurts. When there are significant sector rotations, investors should take notice, as the market cycle tends to show its changes this way. Our view is that this market is in “late-stage growth,” and that while the markets may continue to hit new highs for some time, we are seeing clear structural change.

Over the past decade and more, US Large Cap stocks have led performance, and this is no longer forecast to continue. Many analysts are forecasting a period of lower (5-6%) returns in the S&P 500, going forward, and this is our view as well. On the other hand, we welcome the return to normality that more opportunity in smaller cap and developed foreign stocks represent.

Roth IRAs from 529 Plans

What happens when a 529 plan has been overfunded, so that funds are still in the account when the beneficiary’s college education is complete? If the surplus is removed for other than qualified education expenses, there will be an income tax on earnings and a 10% penalty tax. The SECURE Act 2.0 provides an alternative resolution. Subject to some pretty serious limitations, up to $35,000 of the excess savings may be rolled into a Roth IRA for the beneficiary.

Among the limitations:

• The 529 account must have been in existence for at least 15 years before the rollover
• Contributions and their earnings from the five years before the rollover may not be included in the rollover
• Beneficiary must have earned income as great as the rollover amount in the year of the rollover
• Ordinary Roth IRA contribution limits apply
• The rollover must be a trustee-to-trustee transfer
• Funds cannot revert to the owner of the account

Possible work-around? The Retirement Learning Center has pointed out that a parent who is the 529 account owner for his or her child may be eligible to become a successor beneficiary as a qualified family member. As such, the parent might be able to move the money into his or her own Roth IRA eventually. However, the open question is whether the change of beneficiary would start a new 15-year waiting period before the rollover could happen.

The New Mailbox Rule

The IRS tends to be very strict about filing deadlines. Just a single day beyond a deadline has been enough to trigger penalties for tardy taxpayers. The general rule has been that if a return has been postmarked by the deadline, it is timely filed. Taking the tax return to the Post Office or depositing it in a mailbox before the posted final pickup has been assumed to be sufficient to satisfy that documentation.

Perhaps not anymore. In November the Postal Service finalized a proposed clarification of how and when postmarks are applied. Mail may not necessarily be postmarked on the date it is received, and a postmark only means the mail was in the possession of the Postal Service on that date, not that it was deposited on that date. Some mail is sent to regional centers for automated cancellation. The delay may not be significant, but taxpayers should no longer assume that they will get a postmark on the day they drop off a return.

The best approach is to use registered or certified mail for proof of timely mailing. If one takes this approach, it’s important to keep the receipt because the Post Office does not create an archive of this data. Alternatively, one can request a manual postmark at a Post Office. The Postal Service’s advice on tax filings can be found here.

By the way, the postmark from an office postage machine is not determinative for tax filing purposes; it only creates a rebuttable presumption of timely filing. The IRS has been known to successfully rebut that presumption.