Q4 2025: PFM Quarterly Commentary
Over the years, these pages have devoted considerable time and attention to exploring the intricacies of behavioral finance. After all, every buy or sell order in the markets originates from a human decision, whether made directly by an individual or by an algorithm crafted by one, shaped by heuristics, cognitive biases, and mental models that have been extensively studied and well-documented since the early 1980s. A deep understanding of these fundamental drivers of investment behavior remains an invaluable tool in our efforts to prudently steward client assets.
Yet there is another psychological dimension that profoundly influences market participation and merits closer examination. As we know only too well, human memory is far from infallible. Popular imagination often portrays it as a faithful recording device, capturing events in real time for precise playback later. In truth, memories are not retrieved, but actively reconstructed each time we access them. Gaps are filled with fragments of prior knowledge, current expectations, or newly acquired information. This ongoing reconstitution renders memories remarkably flexible and adaptive, but equally susceptible to distortion. Over time, details shift: some are subtly altered, others added or omitted, and in certain cases entirely fabricated. In everyday life, such distortions are often benign. Consider the fish caught in one’s childhood that grows ever larger with each retelling. In financial markets, however, the stakes are markedly higher. Accurate recollection of the past is essential to success, for as Mark Twain observed, while history may not repeat itself, it often rhymes. This is precisely why we devote considerable effort to reviewing market history and revisiting prior episodes for they offer invaluable insight into how analogous events might unfold in the future.
As we reflect on the fourth quarter of 2025 amid the ongoing Artificial Intelligence frenzy, numerous examples emerge of how memory distortion has shaped the collective recollections of investors and financial pundits alike. In the many annual market retrospectives now flooding media outlets, the year is frequently hailed as a “gangbuster,” marked by “stellar gains,” a “banner year,” or a “relatively smooth ride.” Intra year volatility has been softened into mere “dips” or fleeting “turbulence,” with scant mention of any truly significant drawdowns.
How swiftly the memory fades. The year opened with the market treading water, moving largely sideways, before clawing its way to a modest 4.6% gain by mid-February. What ensued over the subsequent weeks was a harrowing peak-to-trough decline of nearly 21% in the S&P 500-one of the most severe corrections over such a short time frame in modern history, bested only by such history shaping events such as 1987’s Black Monday and the Covid Crisis.[i] Far from a mild “dip,” this episode tested investor resolve amid heightened uncertainty over tariff policy and global trade.
Compounding the turmoil was the longest government shutdown in U.S. history, spanning 43 days and unleashing profound disruption. Headlines brimmed with reports of cascading flight delays from suspended FAA operations, widespread interruptions to public services, and, most critically for markets, the outright suspension of key economic data releases. For an extended period, pivotal institutions like the Federal Reserve were deprived of essential inflation and employment figures, the critical inputs guiding monetary policy for the world’s preeminent central bank. Once again, this upheaval amounted to far more than passing “turbulence.” Yet, as the year’s robust overall returns take center stage, in hindsight, these trying moments have been largely removed from the narrative.
Despite a near-record market decline and an unprecedented government shutdown – one that disrupted nearly 25% of GDP – 2025 will nonetheless be enshrined in investor and media lore as a “stellar” year for equities.[ii] This selective reframing is hardly rare. Individuals frequently recast once-dreaded episodes as relatively harmless once the outcome proves favorable. Psychologists term this well-documented tendency “rosy retrospection”: a cognitive bias that prompts us to minimize past negatives when the ultimate result proves positive.
The phenomenon dovetails closely with a related concept in behavioral finance known as outcome bias. Here, investors retroactively deem past decisions sound if the investment ultimately succeeded, rather than evaluating the quality of the process or analysis at the time. For example, had Amazon succumbed like countless other dot-com ventures in the early 2000s, the notion of Jeff Bezos selling books online from his garage would today be widely dismissed as foolish. Instead, Amazon thrived and Bezos is celebrated as a visionary genius. Now, consider Pets.com, a contemporaneous venture built on the virtually identical premise of selling pet supplies over the internet. It became one of the era’s most notorious flops, filing for bankruptcy mere months after a splashy IPO. Its founder, Greg McLemore, is remembered chiefly for presiding over that high profile failure that has since served as a cautionary tale routinely invoked as the poster child for bubble-era excess (who can forget the lovable sock puppet commercial during Super Bowl XXXIV [34]?). Two parallel ideas, launched in the same frothy environment, yet separated in history by rosy retrospection and outcome bias.
Rosy retrospection is now in full bloom as investors look back on 2025, softening a year that was, in truth, far more harrowing than many accounts suggest. Yet we would argue that this gentle revisionism is not entirely unwelcome. We are reminded of Rita Mae Brown’s wry observation: “One of the keys to happiness is a bad memory.” To be clear, a sharp and faithful memory is a priceless asset, one well worth cultivating. Brown’s point, however, is that selectively forgetting life’s rougher moments can serve us well. For many investors, this insight carries particular weight.
Long-time readers will recall the string of unnerving episodes we have navigated in recent years: Brexit’s uncertainty, the brutal fourth-quarter meltdown of 2018, the COVID-19 pandemic, Russia’s invasion of Ukraine, the punishing 2022 bear market, and the Tariff Tantrum that rattled markets in April 2025. In each instance, our client communications have sought to define the crisis, provide essential context, and remind clients that markets have endured far worse, only to recover and march to new heights. This pattern has held steadfast since the opening of America’s first stock exchange in Philadelphia in 1790. Our message has remained unwavering, regardless of the crisis: Unwelcome events will arise periodically, yet they have always proven transitory, and over time, markets have resolved higher. The U.S. equity markets stand as one of history’s most reliable engines of wealth creation. While it is understandably difficult to shrug off distressing headlines and declining markets in the moment, the ability to move past them relatively quickly, allowing rosy retrospection to do its quiet work, confers a subtle but profound advantage.
We suspect today’s financial pundits are not extolling 2025’s “stellar” outcome from the from perspective of urging investors to look past turmoil toward the market’s ability to overcome every situation. Rather, the evidence suggests they have simply forgotten the sheer gravity of April’s Tariff Tantrum and the government shutdown illustrates this point. A cursory search of headlines and analyses shows dire warnings of endless trade uncertainty, slashed global commerce, cascading layoffs, and rising odds for a recession. Major investment banks such as JP Morgan, Wells Fargo, and Bank of America slashed their S&P 500 targets in early April, after the index had fallen over 20%, of course. We recall no major outlet counseling clients against panic by invoking the market’s 235-year reputation of overcoming adversity. By July, the S&P had reclaimed its losses and forged new highs, relegating the spring’s suffering to footnotes in year-end retrospectives. Alas, this pattern by the financial complex always repeats itself: apocalyptic headlines in the maelstrom followed by amnesia after the rebound. At least they’re consistent. Maybe they should read our letters for some perspective.
It is understandable why the unpleasant events of 2025 might fade from view amid the strong performance across numerous asset classes. The broad-based market advance provided a refreshing contrast to the concentrated, technology-driven gains that dominated recent years. The technology sector and its close relative, communication services, still delivered impressive results, advancing 24.0% and 33.6%, respectively. Yet what truly distinguished 2025 was the broad display of strength: every major asset class we monitor recorded positive returns. The S&P 500 posted a robust total return of 17.7%, with gains in all eleven underlying sectors which exceeded historical averages and drew widespread attention from investors.[iii]
While the S&P 500’s achievement merits recognition, it was surpassed by several long-overlooked segments of the market. Areas such as precious metals, developed international equities, and emerging market stocks delivered standout results despite being absent from the financial media’s narrative over the last few years. Precious metals, as measured by the Aberdeen Standard Physical Precious Metals Index, surged 89.5%; the FTSE Global ex U.S. All Cap Index rose 32.0%; and the S&P Emerging Broad Market Index gained 24.0%. Despite these robust returns, they garnered limited media coverage, leaving many investors unaware of their accomplishment. Similarly, domestic large-cap value stocks (tracked by the S&P 500 Pure Value Total Return Index) and broad commodities (via the SummerHaven Dynamic Commodity Index) produced returns comparable to the S&P 500, at 17.7% and 17.6%, respectively, yet received far less acclaim.[iv]
The standout performance of the S&P 500 in recent years has led many in the investment community to overlook other segments of the market. Perhaps none has been more neglected than fixed income, which endured a prolonged bear market beginning in mid-2020. Yet 2025 marked a sharp rebound for the asset class. Domestic corporate bonds (as measured by the Bloomberg U.S. Credit Corporate 5-10 Year Bond Index) advanced 9.3%, while domestic high-yield bonds (tracked by the Markit iBoxx USD Liquid High Yield 0-5 Year Index) gained 7.9%. International bonds (represented by the Bloomberg Global Treasury ex-U.S. Index) rose 7.7%, and the broad domestic bond market (via the Bloomberg U.S. Aggregate Index) delivered 7.2%.[v] Given that fixed income constitutes a significant allocation in many client portfolios, particularly those with a conservative tilt, strong years for bonds such as 2025 can have a significant impact on overall returns.
Of course, not every asset class matched the market’s strength. While still delivering positive total returns, domestic mid-cap stocks (as measured by the Dow Jones U.S. Mid-Cap Index), small-cap stocks (represented by the S&P SmallCap 600 Index), and U.S. real estate (tracked by the FTSE Nareit Equity REITs Index) all lagged far behind the S&P 500, posting returns of 10.2%, 5.9%, and 2.5%, respectively.[vi] That said, as we’ve seen with precious metals, bonds, emerging-market equities, and developed international stocks, markets are inherently cyclical. Even prolonged underperformers eventually have their moment. It simply requires patience.
As always, we greatly enjoyed our partnership throughout 2025 and deeply appreciate the trust you have placed in us. We wish you and your families a happy, healthy, and prosperous 2026. Please know that we are always at your service, so do not hesitate to reach out with any questions or needs.
Regards,
Peak Financial Management
Disclosures:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, www.adviserinfo.sec.gov. Past performance is not a guarantee of future results.
[i] Bloomberg L.P. 2025
[ii] U.S. Department of the Treasury, Fiscal Data, “Federal Spending,” America’s Finance Guide, last updated November 29, 2025, https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending#federal-spending-overview
[iii] Bloomberg L.P. 2025
[iv] Bloomberg L.P. 2025
[v] Bloomberg L.P. 2025
[vi] Bloomberg L.P. 2025