Arthur Swalley, Chief Investment Officer at Arlington, was asked by the Pacific Coast Business Times to be part of a panel sharing investment forecasts for 2026. Here are Arlington’s insights:
Q: It’s been a turbulent year for the markets, but rates have come down, and equity indexes are at or near record highs. Give us a couple of thoughts about how you are positioning portfolios for 2026?
For last year’s panel we predicted increased uncertainty and volatility, and historically cheap international markets being attractive. We continue to forecast volatility, especially with behavioral economics experts like Nobel laureate Richard Thaler viewing today’s market dynamic as an “acute garbage rally — a dash to trash.” Non-profitable companies such as unproven technology stocks, meme stocks, fledgling quantum computing companies, and bitcoin-sensitive stocks are leading 2025’s performance. Liquidity from soaring worldwide debt is also fueling speculation. Gold and bitcoin established record values, driven by investors seeking safe havens. Risky lending strategies are broadly distributed in illiquid private credit vehicles. Similar waves of investment came to junk bonds in the 1980s and subprime loans in the 2000s. Both waves crashed into a sea of bankruptcies and government bailouts. We are positioning towards high-quality global businesses at attractive prices, higher quality liquid bonds, and away from sectors of speculative excess.
Q: The Mag 7 has been written off, declared a bubble, ignored and then come back. What’s the right diversification strategy?
Currently, the Magnificent 7 makes up more than 35% of the S&P 500. Their expensive valuations are predicated upon sustaining current (very high) profit margins and revenue growth rates. Historically, with outsized growth and margins comes increased competition and/or regulation, and a subsequent regression of valuations to the mean. This is a natural cycle of capitalism and one we believe will apply again – eventually. During the last massive technology investment wave of the late 1990’s, diversification into value and smaller companies, international equities, and bonds was derided as hopelessly anachronistic. The Internet did turn out to be amazingly successful. Investors in 1999 would have been far better off avoiding it completely. Diversification matters, and it works, especially in speculative markets when it’s the most difficult decision to make.
Q: The Fed is badly split on the risk of inflation vs rising unemployment. Where do you see rates headed into 2026?
Yogi Berra (or Niels Bohr about relativity) is famously credited with saying “It’s tough to make predictions, especially about the future.” We think he may have been talking about forecasting interest rates. With the current government shutdown limiting the dissemination of key economic data, the future looks murkier than ever. We also don’t yet know the impact, if any, of the Trump administration’s shrinking and polarization of the federal bureaucracy on the quality and accuracy of the data. With all these qualifications, we think the direction of short-term rates will be dependent upon the labor market first, as Fed Chair Powell laid out in his October comments. Right now, that direction appears to be lower, as stated corporate layoffs are at their highest level since 2009. Inflation is still lurking, though, and snowballing federal deficits seem to be keeping a floor under long-term rates.