2026 Annual Asset Class Review

I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.

By day, I have a comfortable seat next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini could navigate it. Not made for 6’4” guys like me.

I am anything but Houdini, so I foray downstairs to use the larger public hot showers. They are divine.

 

 

We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism. But ICE seems to be everywhere, as is the US Army.

I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.

I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure, and to keep me up to date with the onboard gossip.

The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.

 

Chicago’s Union Station

 

As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way, like Omaha, Salt Lake City, and Reno, to Google obscure data points and download the latest charts.

You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.

Who knew that 95% of America is off the grid? That explains so much about our country today.

I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 17 Pro.

Here is the bottom line, which I have been warning you about for months. In 2025, I topped a 62% profit, putting me in the top 1% of fund managers. You are going to have to navigate the reefs, shoals, and hurricanes in 2026. I will be there to assist you in navigating every step.

In the first half of 2026, stocks may be down as we are entering the new year at extremely elevated levels, facing major challenges. The trigger for a 10%-20% selloff could be an imminent adverse Supreme Court decision on tariffs sometime after January 12. That would deprive the government of $4 trillion in anticipated revenues and put its economic plans in tatters. We may also get another market-damaging extended government shutdown starting January 30.

During the second half of 2026, I expect a rip-roaring rally to year-end.  The government’s hyper stimulus will kick in. Quantitative easing already started on December 1, 2025, which could take the Fed balance sheet from the current $6.8 trillion to $10 trillion or higher.

We will get an ultra-dove as a new Fed governor taking orders from the White House. Treasury efforts to flood the money supply will pour into asset prices. The money printing machines will be running full-time.

Keep in mind that the Mad Hedge AI Market Timing Index is entering 2026 dead in the middle of its historic range at 45. But adhere to the recommendations I make in this report today, and you should prosper mightily.

Let me give you a list of the challenges I see financial markets will face in the coming year:

 

 

The Ten Key Variables for 2026

1) How low will the Fed take interest rates?
2) How high will inflation go as a result?
3) How high will unemployment rise?
4) Will the Supreme Court rule the tariffs unconstitutional?
5) How soon will the Russians give up on Ukraine?
6) Will the rotation from technology to domestic value plays continue?
7) Does the gold bubble continue?
8) Does the commodities boom continue?
9) How fast will the US dollar fall?
10) Can the bond market accommodate record government borrowing, or will it crash?

All the answers are below:

 

 

Somewhere in Iowa

 

The Thumbnail Portfolio

Equities – buy dips
Bonds – sell rallies
Foreign Currencies – buy dips
Commodities – buy dips
Precious Metals – buy dips
Energy – don’t try to catch a falling knife
Real Estate – buy dips

 

 

1) The Economy –Decelerating

It looks like US economic growth drops by half in 2025 from a long-term average of 3% to 1.5%. You may think I’ve been smoking California’s largest agricultural product in view of the 4.3% growth rate reported for Q3. But this figure was flattered by the collapse of imports, which are subtracted from the GDP calculation because they reflect economic activity elsewhere.

To say the US economy was put through a meat grinder in 2025 would be a huge understatement. Thanks to the new tariff regime, which came out of the blue, millions of businesses went under, survivors had to remake their business plans from the ground up, and many were left sitting on their hands awaiting the next shock coming out of Washington.

Some industries are experiencing their worst year since the Great Depression. The California wine industry is a perfect example. It saw its cheap labor force deported, and its export markets wiped out by the trade wars (the French love taxing California wine imports).  Foreign investment moved elsewhere because of the new hostile environment, and consumer tastes fled (hard ciders, etc.). Some 20% of the Golden State’s money-losing vineyards were torn up last year.

What growth we did get was concentrated in literally a dozen technology companies. Thanks to massive new tax subsidies that were made retroactive to January 19, 2025, the Magnificent Seven alone accounted for 75% of a capital investment in the US last year. And they are all buying the same thing: Nvidia Blackwell chips.

This will not end well. Those who lived through the cable boom of the 1990s only to see nascent Internet companies like Amazon (AMZN), Apple (AAPL), and Alphabet (GOOGL) run away with all the profits are seeing déjà vu all over again.

The big challenge for the economy in 2026 is how much it can grow in the face of rising inflation, exploding unemployment, and increasing long-term interest rates. Certainly, the real estate industry, about 20% of the US economy, is toast unless rates reverse the upward ascent. It says a lot that the ten-year US Treasury yields closed the year at a four-month high.

What is happening is that untested economic theories are being forced on the economy, with often disastrous results. The government is subsidizing industries that have already won at the expense of everyone else. The loser is the national debt, which is rising at the fastest rate since Hitler invaded Poland. You can’t have your cake and eat it too.

 

A Rocky Mountain Moose Family

 

2) Equities (SPX), (QQQ), (IWM) (AAPL), (AMZN), (AAPL), (GOOGL), (GS), (MS), (BAC), (C), (BLK), (ABBV), (BIIB), (AMGN), (TSLA), (DHI), (LEN), (PHM), (KBH)

The S&P 500 (SPX) closed the year up 17.7%, less than the previous two years. You may think this is a great accomplishment, but in fact, the US saw one of the worst-performing stock markets in the world in 2025. Investors were scared off by a collapsing US dollar and a government pursuing radical and untested economic policy.

Emerging markets we up +37%, Germany +44%, and Japan up +37%. China seems to have won the trade war with a stock market up a ballistic 48% by picking up the Asian business America abandoned with its exclusionary tariffs.

Since my job is to make your life incredibly easy, I am going to simplify my equity strategy for 2026.

There are really only two sectors you have to focus on at the beginning of 2026: financials and health care. Financials are benefiting from deregulation, exploding mergers & acquisitions, falling overnight interest rates, booming loan demand, and a rising stock market. They are also cheap, with price-earnings multiples in the teens.

The play in health care is the onslaught of new drugs engineered by AI, deregulation, and the retirement of the baby boomers, all 80 million of us. We are also living longer (thanks to Ozempic), creating more demand for health care products and services. Health care shares have the added bonus in that they were beaten like a red-headed stepchild by the new Department of Health and Human Services, taking their share prices down to throw-away levels.

Both sectors are a month into a rally that could last until mid-year. Buy the dips, and there may be a couple of big ones coming up. The names to buy are Goldman Sachs (GS), Morgan Stanley (MS), JP Morgan (JPM), Bank of America (BAC), Citigroup (C), and BlackRock (BLK). In the health care area, I like AbbVie (ABBV), Biogen (BIIB), and Amgen (AMGN).

And then there is the question of what to do about technology stocks. The biggest change to the global economy last year is that these companies have morphed from net lenders to net creditors of the financial system. Their giant cash mountains have been spent on the AI build-out, mostly on Nvidia’s (NVDA) Blackwell chips.

There is a separation between the sheep and the goats going on. The Magnificent Seven companies that have borrowed heavily to finance this buildout, like Meta (META) and Oracle (ORCL), have been severely punished. Those who haven’t have been rewarded. That shrinks the Magnificent Seven down to the Magnificent Four. Buy Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Microsoft MSFT).

As for Tesla (TSLA), it will remain a cult stock driven by momentum and leaks from Elon Musk, as it always has been. With the EV business suffering a nuclear winter, don’t expect profits here. The robots that the company is betting its future on don’t yet exist. Expect volatile trading across a wide range.

There are other sectors that will come alive when economic conditions change. The big one is real estate, the worst-performing sector of 2025. Any sign that a sustainable decline in long-term interest rates has begun, you want to pile into DH Horton (DHI), Lennar (LEN), Pulte Homes (PHM), and KB Homes (KBH).

What is my year-end prediction for the S&P 500 for 2026? I am looking for high single-digit returns as the S&P 500 approaches $7,700.

 

Frozen Headwaters of the Colorado River

 

 

 

 

3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD)

Amtrak needs to fill every seat in the dining car to get everyone fed on time, so you never know who you will share a table with for breakfast, lunch, and dinner.

There was the Vietnam Vet Phantom Jet Pilot who now refused to fly because he was treated so badly at airports. A young couple desperately eloping from Omaha could only afford seats as far as Salt Lake City. After they sat up all night, I paid for their breakfast.

A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites returned home by train because their religion forbade automobiles or airplanes.

The coming year could be the most challenging of the bond market since ten-year Treasuries peaked at 15.84% in 1981. Suddenly, everybody wants to borrow money.

The US Budget deficit for 2026 is $5 trillion. If the Trump tariffs are ruled illegal, that jumps to $6 trillion because the nearly $300 billion collected in 2025 has to be refunded. A further $1.5 trillion is needed by US tech companies to build out AI. Europe is slated to borrow $2.4 trillion to finance the Ukraine War. Japan is borrowing nearly $1 trillion to stimulate its own economy. The bond market in Japan has already collapsed.

Foreign investors have been frightened away from the US bond market by a collapsing US dollar, which just saw its worst year in a decade. 2026 will be worse. Trade wars and tariffs aren’t making us a lot of friends among foreign bond investors. China hasn’t bought any new Treasuries in four years and is letting what it has mature without rolling over. That leaves Japan as the largest foreign buyer of US paper.

The big question is whether the world can accommodate this much borrowing. If it can, the US might see 1.5%-2.0% GDP growth for 2026. If it can’t, interest rates will soar, the housing market will collapse, and the stock market will crash. While further Fed interest rate cuts are assured, these only apply to overnight rates. The market controls long-term rates.

To head off this risk, the Fed initiated quantitative easing on December 1. This involves the Fed buying trillions of dollars of bonds in the secondary market, thus boosting the Fed’s balance sheet. The Treasury is also shifting a larger share of borrowing to the Treasury bill market to keep pressure off the long end.

Whether this will work is anyone’s guess. With the debt ceiling currently at $42 trillion, 135% of the $31.1 trillion US GDP, we are definitely in uncharted territory. I’d be avoiding the bond market in 2026. The risk/reward is terrible. There are too many better fish to fry.

Avoid (TLT).

 

 

A Visit to the 19^th Century

 

 

 

 

4) Foreign Currencies (FXE), (FXC), (FXA), (FXY), (CYB)

With a major yield advantage over the rest of the world for the last decade, the US dollar was on an absolute tear. After all, the world’s strongest economy begets the world’s strongest currency.

That ended in 2025.

If your primary assumption is that US interest rates will see a sharp decline sometime in 2026, then the outlook for the greenback is terrible.

Currencies are driven by interest rate differentials, and the buck is soon going to see the fastest shrinking yield premium in the forex markets. Trade wars and America’s new isolationist policies have further knocked the wind out of the US dollar.

That shines a great bright light on the foreign currency ETFs. You could do well buying the Australian Dollar (FXA), Euro (FXE), and British Pound (FXB).

Look at the 50-year chart of the US dollar index below, and you’ll see that a 13-year uptrend in the buck has rolled over to a 5-10 year down move.

Draw your weapons.

 

 

 

 

 

5) Commodities (FCX), (VALE), (DBA)


If you liked gold in 2025, you are going to love copper in 2026. Copper will become the new gold, which saw the barbarous relic rise an incredible 60% last year.

By now, the word has gotten out that AI has immense power demands. We got in on this trade in 2024 by loading the boat with nuclear power plays, like NuScale (SMR) and Vistra Energy, which have since tripled. The demand for copper spawned by AI will be equally prodigious. This will be a decade-long trend.

Commodities are now the high-beta play in the financial markets. That’s because the cost of being wrong is so much higher. Get on the losing side of a commodities trade, and you will be bled dry by storage costs, interest expenses, contangos, and zero demand.

Commodities have one great attribute. They predict recessions and recoveries earlier than any other asset class. When they peaked in March of 2022, they were screaming loud and clear that a recession would hit in early 2023. By reversing on a dime on November 13, 2023, they also told us that a rip-roaring recovery would begin in 2024. It duly arrived.

You saw this in every important play in the sector, including Broken Hill (BHP), Peabody Energy (BTU), and Freeport McMoRan (FCX). And who but me noticed that Alcoa Aluminum (AA) was up an incredible 50% in December? Maybe you can’t teach an old dog new tricks, but the old tricks work pretty darn well!

The heady days of the 2011 commodity bubble top are about to replay. Now that this sector is convinced of a substantially weaker US dollar and lower inflation, it is once more a favorite target of traders.

China will finally rejoin the global economy as a growth engine in 2026.
And here’s another big new driver. Each electric vehicle requires 200 pounds of copper, and production is expected to rise from 2 million units a year to 20 million by 2040. Annual copper production will have to increase threefold in a decade to accommodate this increase, no easy task, or prices will have to rise.

The great thing about commodities is that it takes a decade to bring new supply online, unlike stocks and bonds, which can merely be created by an entry in an Excel spreadsheet. As a result, they always run far higher than you can imagine.

Accumulate all commodities on dips, especially (FCX).

 

 

 

Snow Angel on the Continental Divide

 

 

6) Energy (DIG), (RIG), (USO), (DUG), (UNG), (XOM), (OXY)


There was no worse place to be than energy in 2025. OPEC ignored quotas and overproduced. The world’s largest consumer, China, saw its economy slow. Energy efficiencies continue to improve unabated. Massive tax subsidies, such as the oil depletion allowance, have led to overproduction in the US. Even the worst geopolitical crisis, like the Gaza massacre, couldn’t generate a rally of more than a few weeks.

While the Ukraine War caused an initial spike in oil prices, the eventual end of the war will lead to a flood of new supply from Russia. This overhangs the oil market like a sword of Damocles.

Oil stocks have performed nowhere near as badly as the underlying commodity. This is because they pay high 5% dividends in a yield-hungry world. Investors are also hoping that the price of oil will recover someday and want to accumulate leveraged upside plays at bargain prices.

Long-term players like Berkshire Hathaway (BRK/B) have been accumulating quality names like Exxon Mobil (XOM) and Occidental Petroleum (OXY). But they have more patience and staying power than any of us. Two other interesting names are Diamondback Energy (FANG) and Devon Energy (DVN).

 

 

 

 

7) Precious Metals (GLD), (DGP), (SLV), (PPLT), (PALL), (WPM), (NEM), (B)

The train has added extra engines at Denver, so now we may begin the long, laboring climb up the Eastern slope of the Rocky Mountains.

On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.

The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a passenger train over on its side.

In the snow-filled canyons, we saw a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year.

We also see countless abandoned 19^th century gold mines and the broken-down wooden trestles leading to huge piles of tailings, relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.

OK, I have been saving the best for last. Precious metals were far and away the best-performing asset class of 2025.

Here, it’s important to look at the long view on gold. The barbarous relic tends to have good and bad decades. During the 2000’s, the price of the yellow metal rose tenfold, from $200 to $2,000. The 2010s were very boring, when gold was unchanged. Gold is doing well this decade, and a double or triple is in the cards.

The reason is falling interest rates, which reduce the opportunity costs of owning gold. The yellow metal doesn’t pay a dividend, costs money to store and insure, and delivery is an expensive pain in the butt.

Chart formations are looking very encouraging with a massive upside breakout in place. So, buy gold on 10% dips if you have a stick of courage on you, which you must if you read this newsletter.

Of course, the best investors never buy gold during a bull market. They Hoover up gold miners, which rise four times faster, like Barrack Gold (B), Newmont Mining (NEM), and the basket play Van Eck Vectors Gold Miners ETF (GDX).

Higher beta silver (SLV) will be the better bet, as it already has been, because it plays a major role in the decarbonization of America. There isn’t a solar panel or electric vehicle out there without some silver in them, and the growth numbers are positively exponential. Keep buying (SLV) and Wheaton Precious Metals (WPM) on dips.

 

 

 

 

Crossing the Great Nevada Desert Near Area 51

 

8) Real Estate (ITB), (LEN), (KBH), (PHM), (DHI)

The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write. 

My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.

It is a route long traversed by roving bands of Indians, itinerant fur traders, the Pony Express, my own immigrant forebearers in wagon trains, the Transcontinental Railroad, the Lincoln Highway, and finally US Interstate 80, which was built for the 1960 Winter Olympics at Squaw Valley.

Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.

An investment in real estate has been completely dead money for the past four years. Inventories are rising, but prices remain stubbornly high.

The bad guy here is, of course, high interest rates. The 30-year conventional fixed-rate mortgage remained stuck above 7.0% for most of 2025. In recent months, they have drifted down to 6.15%, spurring demand.

I have a feeling that we are on the first of a major new bull market in real estate.

The reasons, of course, are demographic. There are only three numbers you need to know in the housing market for the next ten years: there are 80 million baby boomers, 65 million Generation Xer’s who follow them, and 86 million in the generation after that, the Millennials.

The 76 million baby boomers (between ages 63 and 80) have been unloading dwellings to the 72 million Gen Xer’s (between ages 41 and 56) since prices peaked in 2007. But there are not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That’s what caused the financial crisis. That has created the present shortage of housing, both for ownership and rentals.

The 72 million Millennials, now aged 25-40, are the dominant buyers in the market. They are transitioning from 30% to 70% of all new buyers of homes. They are also just entering the peak spending years of middle age, which is great for everyone. Hot on their heels are 68 million Gen Z, who are now 12 to 27 years old.

The Great Millennial Migration to the suburbs and Middle America has just begun. Thanks to the pandemic and Zoom, many are never returning to the cities. That has prompted massive numbers to move from the coasts to the American heartland. 

That’s why Boise, Idaho, was the top-performing real estate market in 2023, followed by Phoenix, Arizona. Personally, I like Reno, Nevada, where Apple, Google, Amazon, and Tesla are building factories as fast as they can, just a four-hour drive from Silicon Valley. 

As a result, the price of single-family homes should continue to rise during the 2020’s, as they did during the 1970s and the 1990’s, when identical demographic forces were at play.

This will happen in the context of a labor shortfall, rising wages, and improving standards of living.

Increasing rents are accelerating this trend. Renters now pay 35% of their gross income, compared to only 18% for owners, and less when multiple deductions and tax subsidies are considered. Rents are now rising faster than home prices.

Remember, too, that the US has not built any new houses in large numbers in 18 years. 50% of small home builders that went under during the Financial Crisis never came back.

We are still operating at only half of the 2007 peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.

There is a new factor at work. We are all now prisoners of the 2.75% 30-year fixed-rate mortgages we all obtained prior to 2021. If we sell and try to move, a new mortgage will cost double today. If you borrow at a 2.75% 30-year fixed rate, and the long-term inflation rate is 3%, then, over time, you will get your house for free. That’s why nobody is selling, and prices have barely fallen.

Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now, after you throw in all the tax breaks. It’s also a great inflation play, which is rising monthly thanks to the tariffs.

That means the major homebuilders like Lennar (LEN), Pulte Homes (PHM), and KB Homes (KBH) are a buy on the dip. But don’t forget to sell your home by the 2030’s when the next demographic headwind resumes. That’s when you should unload your home to a Millennial or Gen Xer and move into a cheap rental.

A secondhand RV would be better.

 

 

 

Crossing the Bridge to Home Sweet Home

9) Postscript

We have pulled into the station at Truckee amid a howling blizzard.

My loyal staff have made the ten-mile trek from my estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.

 

After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.

Well, that’s all for now. We’ve just passed what was left of the Pacific mothball fleet moored near the Benicia Bridge (2,000 ships down to six in 50 years). The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my plastic water bottle. Nice science experiment!

The Golden Gate Bridge and the soaring spire of Salesforce Tower are just coming into view across San Francisco Bay.

A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my MacBook Pro and iPhone 17 pro, pick up my various adapters, and pack up.

We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak and still get home in time to watch the ball drop in New York’s Times Square on TV.

I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.

So you have to ask the question, did I, the man who knows everything, been everywhere, and done everything, learn anything in 2025?

Absolutely.

Never pull the pin on a hand grenade with your teeth. That only happens in the movies. I learned that the hard way at the front in Ukraine. The new tooth implants will be done in April.

I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above, which should be soon.

Good luck and good trading in 2026!

John Thomas
CEO and Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

The Omens Are Good for 2026!