The start of the holiday season offers a valuable moment to reflect on both personal and financial achievements. Investors often concentrate on potential risks rather than celebrating successes. With markets currently showing strength, examining the past year's performance provides useful context as we look toward emerging challenges and opportunities.

Historically, financial markets have produced solid returns, and the current year continues this trend. Year-to-date, the S&P 500 has risen more than 15% including dividends, while the Bloomberg U.S. Aggregate Bond Index has delivered roughly 7% returns. For the first time in several years, international equities have surpassed U.S. stock performance. This widespread strength across multiple asset classes has enhanced many diversified portfolios. What should investors consider as they look ahead to the next year?

The bull market has reached its fourth year

To begin, investors have reason to appreciate that markets have delivered strong results this year, even amid volatility. The current bull market cycle, which started following the October 2022 market low, is now in its fourth year.

Although past results don't guarantee future outcomes, historical patterns indicate bull markets typically extend well beyond bear markets, frequently lasting five to ten years or longer. Previous bull markets have generated cumulative gains that substantially exceed what this cycle has produced thus far, even when investors encountered significant obstacles during those periods. Despite valid concerns regarding valuations and market concentration, successful long-term investing requires weathering various market environments.

The positive performance in the bond market deserves recognition following several difficult years of rising rates and elevated inflation. With rates stabilizing and the Federal Reserve resuming its easing cycle, bond values have improved. This illustrates why maintaining exposure to both equities and fixed income remains valuable for portfolio diversification and income production.

This market strength reinforces a key concept: attempting to predict market timing based on near-term developments is challenging and potentially harmful when not aligned with comprehensive financial planning. This held true even during April when markets approached bear territory following new tariff announcements. Markets recovered swiftly and reached fresh record highs. Disciplined investors benefited from staying invested, while those who reacted emotionally to news may have forfeited gains and could remain out of the market.

The inflation picture has brightened and rate cuts have begun

Additionally, investors can appreciate the improvement in inflation, despite the pace of progress being slower than many anticipated. Consumer prices have increased approximately 3% over the trailing twelve months, which continues presenting difficulties for families and policymakers. From an investment perspective, however, inflation has become more predictable, and concerns about uncontrolled price increases have diminished compared to previous years.

This environment has enabled the Fed to initiate rate reductions after maintaining restrictive policy for much of the year. These cuts also aim to support the labor market, which has shown signs of softening since summer. Lower rates have historically benefited equities and bonds by decreasing financing costs for companies and households while increasing the value of outstanding bonds carrying higher yields. Therefore, while inflation and rates will continue influencing markets, fears of perpetually rising inflation and rates seem to have subsided.

Strategic asset allocation balances risk while pursuing returns

Lastly, investors should value the role of continuous risk oversight and appropriate asset allocation. The upcoming year will undoubtedly present fresh uncertainties, as every year does. When these arise, concerns about economic contractions, declining markets, and cycle endings will naturally emerge. Rather than responding to each market development, long-term investors can maintain portfolios designed to handle various phases of market and economic cycles.

We can also be grateful for the availability of diverse assets that help manage risk and reward tradeoffs. Risk oversight matters throughout an investor's timeline, particularly following a three-year market advance. The S&P 500 price-to-earnings multiple of 22.6x exceeds historical averages and is gradually nearing its dot-com era peaks.

While valuations don't forecast short-term market direction, this doesn't preclude continued strong performance. It does suggest, however, that prospective returns may be more moderate, particularly relative to less expensive asset classes and market segments. Maintaining realistic expectations and holding positions in more attractively valued market areas becomes increasingly important.

Debates surrounding artificial intelligence will continue. Given the technology's transformative potential, uncertainty about stock price implications is understandable. This parallels the difficulty of forecasting how the internet revolution would develop starting in the mid-1990s. Political uncertainty will likely remain elevated with evolving tariff policies, geopolitical tensions, expanding national debt, and other factors. Recent experience confirms that excessive reactions to these developments are counterproductive and can disrupt financial planning.

The bottom line? The holiday period presents an excellent opportunity for reflection and portfolio evaluation. Well-designed portfolios achieve balance across various asset classes while remaining focused on financial objectives. This approach continues to be essential for successfully managing both challenges and opportunities in the coming year.