Key Concepts
- Short-Termism: A focus on immediate gains over long-term sustainable growth, particularly prevalent in the 2025 market.
- Drafting the Market: A strategy of positioning investments slightly behind market leaders to benefit from their momentum while mitigating risk.
- Cyclical Defensives: Industries and companies that perform consistently well across economic cycles, offering relative stability and value (e.g., Healthcare, Industrials).
- Beta: A measure of a stock's volatility in relation to the overall market.
- Core/Core-Plus Bond Strategy: A bond investment approach focused on high-quality, intermediate-term bonds to secure elevated income.
- Fiscal Stimulus: Government spending and tax policies designed to stimulate economic activity.
Market Dynamics & The Risk of Short-Termism
Emily Roland, Co-Chief Investment Strategist at John Hancock, cautions against the prevailing short-term investment focus that characterized 2025. She describes the year as a “short-term investor’s dream market,” driven by trend-following, momentum trading, and technical analysis – essentially, “buying a chart going up and winning.” This has led to gains in areas like unprofitable tech, retail favorites, crypto, and even countries with limited underlying economic strength.
The core concern is the longevity of this trend. Roland emphasizes the difficulty in predicting when short-termism will end, likening it to a game of “musical chairs.” She highlights a potential “giant misallocation of capital” as long-term investors observe inflated valuations in assets like cryptocurrency. The key is finding a balance between short-term gains and long-term sustainability.
Positive Sentiment & Catalysts for 2026
Despite the concerns about short-termism, Roland identifies several positive factors expected to support the market in 2026. These include:
- Corporate Earnings: Projected to grow by 14% according to Street estimates, a figure John Hancock believes is achievable.
- Dollar Weakening: Approximately 40% of S&P 500 company revenues originate internationally, making a weaker dollar advantageous for translation.
- Fiscal Stimulus: The recent “one big beautiful bill” is expected to positively impact corporate profit margins.
"Drafting the Market" – A Strategic Approach
Roland introduces the concept of “drafting the market” as a strategic response to the current environment. Drawing an analogy to race car driving, she explains that being the lead car (taking excessive risk for short-term gains) carries the risk of an “accident.” Instead, the optimal position is slightly behind the leader, benefiting from the momentum (“beta”) while reducing exposure to potential setbacks.
This strategy translates to favoring cyclical defensive stocks. These sectors, such as Healthcare and Industrials, demonstrated strong earnings growth in the third quarter of the previous year. They offer “great return on equity, great margins, great earnings growth prospects,” and provide diversification beyond the technology sector, which John Hancock still favors but advocates broadening exposure from.
Shifting Investment Landscape & Bond Opportunities
Roland predicts that 2026 will be an “up year,” though likely with more moderate gains than recent years. The key will be a “changing of the guard” in market leadership, necessitating a broader portfolio approach.
She specifically recommends increasing exposure to bonds, noting that approximately $7 trillion is currently held in cash, primarily in money-market funds. She anticipates that interest rates on these funds will decline in 2026, making a core/core-plus bond strategy – focusing on high-quality, intermediate-term bonds – particularly attractive. This strategy allows investors to “lock in” elevated income in the 4-5% range, creating a sustainable return stream for clients.
Notable Quote
“The markets been in fifth gear this entire year but you've won by taking a ton of risk and you don't necessarily want to be that lead car because you can risk an accident.” – Emily Roland, emphasizing the dangers of excessive risk-taking in the current market.
Conclusion
The central takeaway is a shift in investment strategy. While 2025 rewarded short-term, high-risk tactics, 2026 is expected to favor a more balanced approach. “Drafting the market” through exposure to cyclical defensives and leveraging the potential of a core bond strategy are presented as key elements for navigating the evolving market landscape and securing sustainable returns. The emphasis is on portfolio breadth and a proactive approach to capitalizing on changing market dynamics.
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