Newsletter

Economy, Stocks and Bonds

February 2026

It has been an interesting start to the year. In late January, there was further fracturing in the traditional configuration of global alliances along with an increase in hostilities. This includes a prominent disagreement with our NATO allies as to the potential for the U.S. to control Greenland, which many analysts believe has the potential to break the alliance entirely. We are watching the development of a more independent European trade bloc, and the notable situation after Venezuela’s Maduro was captured and brought to face trial in the US on drug charges. Hostilities between the U.S. and Iran have been ratcheting up as well. Overall, the world seems to have become more complicated. With these developments, we see a further fracturing of the globalism that has defined the period between the end of WWII and the recent past. Arguably, academic papers have been writing about this decline for much longer than it has been part of the public discourse. Globalization has been dying for some time, and we are entering a new era of great power competition. 

The past year has seen the continuance of a rate-cutting cycle at the Federal Reserve, with the December cut of 25bps to end the year at a policy rate of 3.75%. While the FOMC has apparently created a “soft landing,” or completed a hiking cycle without causing enough economic slowdown to induce a recession, it appears that inflation remains elevated, and this could prove problematic as the economic cycle unfolds. For now, the economy appears to be growing at nearly double the long-term sustainable growth rate and inflation does not appear to be meaningfully slowing down.

The yield curve has notably steepened, with 10-year Treasury yields up ~60 basis points from where they were at the beginning of the rate cutting cycle in September of 2024. This reflects a relatively healthy scenario, as intuitively yields should be rising the further out in duration one goes, to compensate for the potential for loss of purchasing power, otherwise defined as inflation. 10-year A-rated corporate bond yields are up ~47 basis points, and this reflects a view that the default risk premium may be declining, another indication that for now, the economy and markets appear relatively healthy.

We are expecting a somewhat volatile year in the S&P 500, which has been illustrated in recent weeks with rising average true range, the difference between the high and low of each day over an average period, which has at times doubled what it ended the year at. This indicates a market that may be at risk of a larger correction. The VIX volatility index is ~21 as of this writing, which suggests a forecast for average daily moves of ~1.3% over the next 30 days. We would not view volatility in the next month or two to be significant strategically, unless there were other more worrying signs, which as of this writing there are not.