• Last rate cut was at the December 2025 FOMC, policy rate sitting at 3.50-3.75%. Expect more cuts in 2026 albeit with less frequency.
• Data uncertainty is elevated: the US government shutdown delayed key releases (jobs, CPI), which complicates the Fed’s decision-making, data that has rolled in has been weak jobs and stagnant CPI.
• Kevin Warsh has been pushed to the forefront as Trump's nominee for Fed Chair; potentially focused on rate cuts as well as reducing the size of the fed balance sheet.

Key risk: If the Fed maintains restrictive policy too long while the economy weakens, growth could be impaired. Equally, cutting too quickly while inflation remains sticky could reignite. Hard challenge to navigate. 

• Headline CPI in January was 2.4% YoY.
• Core inflation fell to 2.5% in January, a decrease from previous months.
• Goods inflation continues to ease, reflecting cooling demand and improved supply chains.
• Huge PPI print at a 0.5% increase up to 2.9% in January; that could very well pass through to the consumer in upcoming months.

• Job creation has slowed significantly, with several months of weak private-sector hiring.
• The unemployment rate has drifted into the 4.4% range, reflecting a softer demand for labor.
• Corporate hiring freezes are becoming more common, and wage growth has moderated. Potential AI threat?
• Meaningful downside risks present even in a cooling scenario. 

Domestic policy is becoming increasingly volatile under the current administration as compared to years past. This brings economic positives but also the possibility of social unrest, especially if the K-Shaped economy continues to widen the wealth gap. International policy has also heated up on multiple fronts:

• Iran: US operation aims to allow the Iranian public to overthrow their authoritarian regime. Instability threatens the most-important energy corridor in the world: The Strait of Hormuz.
• Venezuela: Political instability and uncertainty around sanctions, oil production, and election outcomes create episodic energy-market and emerging-market risk.
• Greenland: Rising geopolitical importance due to strategic location, Arctic shipping routes, and critical mineral resources adds long-term geopolitical and defense-related uncertainty.

Portfolio implication: A higher risk premium is justified, and portfolios should reflect a balance of offense (innovation) and defense (quality, shorter duration, diversifiers).

• Tariffs remain an active geopolitical tool. While escalation is not the base case, tariff-related volatility can flare quickly. The Supreme Court's decision has effectively capped the "blanket" tariff rate at 15%, but specific sectors can still be targeted by the executive branch. 
• Tax policy remains in gridlock: extensions of existing tax cuts are still expected, but broader tax reform is unlikely in the near term.
• Fiscal deficits remain historically large, keeping upward pressure on inflation expectations and limiting the government's ability to deploy stimulative fiscal policy without cost.

Policy implication: More episodic volatility and a higher structural inflation floor.

• AI remains early in its adoption curve, driving capex cycles and productivity investments.
• The market is broadening beyond the “Magnificent 7,” with mid-cap innovators gaining traction.
• In a slower growth environment, winners will be defined not just by innovation but by execution, margin discipline, and scalability.

 Innovation leadership remains essential — but with higher scrutiny on earnings quality.

• Fixed Income:  Continue to favor shorter durations given policy uncertainty and inflation risk.  Longer-dated bonds remain less attractive until inflation expectations decline and policy path becomes clearer. Real‐return (inflation‐adjusted) securities may be more interesting, but still challenged if inflation persists.
• Equities:  Quality companies with strong cash flow and pricing power remain key.  Innovation/technology exposures still compelling given secular themes. But valuations are elevated and growth is slowing, so selectivity is critical. Energy outperformance likely.
• Alternative/Strategic Assets:  Given inflation and policy risks, diversifiers (real assets, alternatives) continue to merit consideration.
• Digital Assets (e.g., Bitcoin):  If you still view them as strategic (as we do), the current volatility and policy backdrop may make them more interesting from a diversification/long-term adoption standpoint—but they require higher conviction and tolerate higher risk. As Global Liquidity (M2) continuously increases, our view is Bitcoin will appreciate.

Key risk dynamics:

• Energy supply disruption risk — The effective closure of the Strait of Hormuz, a critical chokepoint for ~20% of global seaborne oil flows, has sharply reduced tanker transits, driven up war-risk insurance costs, and pushed oil prices higher.

• Inflation and growth impacts — Elevated oil and gas prices create renewed inflationary pressure and could depress growth in energy-importing regions if disruptions persist.

• Trade and shipping volatility — Major shipping lines have rerouted vessels and suspended transits through the Gulf; insurance premiums on maritime routes have surged, tightening “effective supply” even without well outages.

• Regional contagion risk — Iranian retaliation has extended to missiles and drones targeting U.S., Israeli, and allied positions across the Gulf, with proxy groups (e.g., Hezbollah) entering the conflict, adding to spillover risk.

• Market reactions — Equities in some regions have weakened on heightened risk sentiment, while safe havens like gold have strengthened. Broader macro contagion remains a risk if conflict spreads or impacts global supply chains.

Market takeaways: The conflict has transitioned from a regional tactical risk to a macro-relevant geopolitical shock, with implications for energy prices, inflation expectations, risk across asset classes, and short-term volatility — influencing strategic positioning and risk management frameworks.