Happy New Year! It is great to be back and into the swing of things after a good holiday season. To start off this year, I wanted to look back at some of the main economic themes of the last 18 or so months and guess what we can look forward to hearing about in 2026.
The soft-landing narrative (or hope) we have been hearing about since the sharp increase in interest rates has materialized for the most part. The most recent CPI data as I write this was the November report showing a 2.7% inflation rate through November 2025[1]. I would note that December CPI comes out on the 13th of January and will reflect more recent data. One of the primary components of a soft landing is inflation getting back to around the 2% target. We have not gotten all the way there. The latest jobs report (another part) showed an unemployment rate of 4.4%, which isn’t a sharp increase indicative of past recessionary times[2]. Theoretically, it increased enough to help with inflation but maintained enough strength to keep consumer spending stable. Additionally, we haven’t fallen into a recessionary period since the sharp increase in the Federal Funds rate in 2022-2023. Overall, the landing, if not exactly what the Fed wanted in terms of inflation, has been a soft landing.
Globally, the IMF is expecting growth to slow, and they attribute much of this to more protectionism and fragmentation of economies[3]. They do project the US to be at about two percent growth, which leads most advanced economies (estimates) and significantly outpaces Euro estimates (note these are going forward projections and subject to change). With that said, the most recent JP Morgan Guide to the Markets show US valuations are still more than one standard deviation above 30 year averages as measured by P/E ratio (slide 5), and foreign markets had a great year relative to US for the first time since 2017 (slide 56)[4]. There were also currency tailwinds for US investors in international markets with the dollar index falling last year. Diversifying and not ignoring international markets is still prudent moving forward. The outperformance in 2025 was not just luck but at least partially a side effect of the extreme valuation gap in US Tech sectors and the rest of the world[5].
The Federal Reserve’s aggressive hiking cycle in 2022 caused volatility across the board but helped set the foundation for where we now sit in 2026. Because of sky-high inflation in the pandemic era economy, the Fed was forced to face the inflationary threat that proved to be more than “transitory”. The aggressive hiking cycle hurt fixed income returns, while also punishing some of the higher growth sectors of the stock market due to a higher discount rate on future cash flows in valuation models. Yes, 2022 was rough for the 60/40 investor, but I feel it accomplished several good things in retrospect[6]. Previously, there was a concept for investors called TINA, There Is No Alternative (to equities). With interest rates on the floor the equity market was the best chance to get return for the risk taken. There was nowhere to hide and 2022 proved that. However now, with more normalized rates, there is an expectation that diversifying portfolios will have more of a hedging effect when there is a pullback in equity markets. Alongside that, there is an expectation of yield on fixed income securities and in cash albeit with a drag on returns when compared to average equity market returns.
As always, it is good to have clients focusing on their long-term plan, staying the course and making sure targets are on track and goals are being addressed. I hope everyone has a happy, healthy, and safe 2026.
[1] https://www.bls.gov/news.release/cpi.nr0.htm
[2] https://fred.stlouisfed.org/series/UNRATE
[3] https://www.imf.org/en/publications/weo/issues/2025/10/14/world-economic-outlook-october-2025
[4] https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/
[5] https://www.morningstar.com/markets/why-2025-is-year-invest-international-stocks
[6] https://www.businessinsider.com/investing-strategy-60-40-portfolio-stocks-bonds-yields-hedge-blackrock-2026-1
