Gold, Growth, and a World in Transition
The start of 2026 has seen a dramatic shift in the geopolitical landscape following the US. The early weeks of 2026 have seen unusually strong demand for gold and other physical metals as investors respond to a weakening US dollar and heightened global uncertainty. Gold has advanced steadily, while silver, supported by its essential role in electronics, semiconductors, and medical technologies, has risen sharply over the past year. Beyond these precious safe havens, industrial metals such as copper and aluminum remain in high demand, reflecting long-term supply constraints and the rapid construction and electrification of AI infrastructure.
This aggressive move toward hard assets is occurring alongside meaningful changes in the global economic landscape. Discussions at the World Economic Forum in Davos highlighted a growing shift away from the cooperative, rules-based framework that has defined global trade for decades. Countries are increasingly prioritizing domestic resilience, supply-chain security, and strategic industries. In response, several governments, including Canada, are pivoting, prioritizing economic reforms to reduce taxes, spur business investment, increase defense spending, and rebuild infrastructure.
In the United States, global uncertainty is intersecting with the possibility of a shift in monetary policy leadership. The nomination of Kevin Warsh to succeed Jerome Powell has raised expectations for a different policy mix, one that may allow lower short-term interest rates while placing greater emphasis on reducing the Federal Reserve’s balance sheet. Efforts to shrink the balance sheet would increase the supply of Treasury securities available to investors, contributing to upward pressure on longer-term interest rates.
“Discussions at the World Economic Forum in Davos highlighted a growing shift away from the cooperative, rules-based framework that has defined global trade for decades. Countries are increasingly prioritizing domestic resilience, supply-chain security, and strategic industries.”
These developments have resulted in a steeper yield curve, with higher long-term rates reflecting concerns about structural inflation and rising government borrowing needs. Against this backdrop, some investors have increased allocations to metals as a diversification tool, particularly as confidence in traditional foreign reserve currencies wanes.
Despite these macroeconomic and geopolitical concerns, US equity markets have remained resilient. Corporate earnings have now grown at a double-digit pace for five consecutive quarters, and profit margins are at record-breaking levels. This strength has been most evident among companies with significant international revenue exposure, which have benefited from the weaker dollar and continued global demand. Ironically, the same weakening dollar that alarms currency investors is providing a significant tailwind for these globally positioned companies.
In contrast to the caution signaled by increased demand for safe-haven assets, strong corporate profitability suggests that productivity gains, particularly those linked to artificial intelligence, are supporting economic growth and efficiency. For investors, this environment underscores the importance of balanced portfolios that maintain exposure to growth opportunities while incorporating assets that help manage volatility in a changing global landscape.
Geopolitical
The geopolitical backdrop this month is being driven by a more confrontational US posture on trade and security.
President Trump continued a rapid-fire pattern of new tariff threats aimed not only at strategic competitors but also at key allies, including Canada and Mexico. Ongoing tariff threats, even when partially reversed, show that trade uncertainty is becoming a lasting feature of the policy landscape. The bigger economic impact may stem not from any single tariff rate, but from the unpredictable pattern of announcements, exemptions, and retaliation risks.
The Greenland episode highlighted how US–Europe tensions can quickly impact markets and investments. While rhetoric caused brief market swings, the main effects were seen in capital flows, with expectations of deeper US involvement boosting local assets. The focus on Arctic security, minerals, and limiting Chinese influence underscores how the US is using security frameworks to shape economic and strategic outcomes.
Finally, China’s record near 1.2 trillion dollar trade surplus at the end of 2025 is increasingly shaping global markets. Large private-sector overseas investments and potential yuan shifts are making global liquidity more sensitive and creating risks of broader market volatility.
Inflation & Jobs
By late 2025, labor market data weakened significantly, with payroll growth slowing sharply and later revisions showing conditions were even softer than initially reported. But in early 2026, there were early signs that the labor market might be stabilizing. The unemployment rate unexpectedly dipped to 4.4%.
On the inflation front, data has generally been moving in the right direction, but not in a straight line. Core and headline inflation readings eased into late 2025 and continued to cool at the start of 2026. Specifically, core Consumer Price Index data recently fell to 2.6%. Producer prices ran hot on the surface but looked more modest after revisions and energy effects.
This inflation and jobs environment puts the Fed in a difficult position. The job market is cooling but not collapsing, which is hard to interpret. Monetary policy decisions hinge on whether the slowdown is temporary or more lasting. Yet, the recent cooling inflation allows the Fed to keep focus on the labor market fragility, but are still striving for a return to the 2 percent target.
The future of inflation and employment is further complicated because consumer spending has remained strong. However, that strength may be uneven across households; specifically, consumer spending is stronger for higher-income consumers relative to lower-income consumers. This can make overall growth appear healthier than many people’s actual experience. As a result, inflation may not decline quickly, even if hiring remains weak.
Key items to watch are whether hiring continues to stabilize or reverts downward, and whether inflation progress stays broad-based or individualized by specific categories. One general risk or question is, are we in an economy that feels weaker than the growth data implies?
Federal Reserve
After cutting rates three times last fall, the Fed held the policy rate steady in January at the 3.5% to 3.75% range. This was a clear signal that the Fed is not eager to ease again immediately and believes current policy is close to “neutral”. It seems that additional rate changes will require a clear deterioration in inflation or employment data.
Inflation has been slowly trending in the right direction, but the Fed is still watching for a tariff-related inflation bump in early 2026. Further, the labor market has cooled but not cracked, which is exactly the scenario that produces a policy “holding pattern.”
There are a few uncommon forces uniquely impacting the Fed as of late. First, divisions within the Fed are becoming more visible, with recent rate decisions drawing dissent from governors who favored another cut. This unusual disagreement makes the Fed’s policy path less predictable and the markets more sensitive to each new data release.
“The Justice Department probe and public disputes have intensified questions about Fed independence, prompting strong support from major central banks worldwide.”
Second, there is an escalating clash between President Trump and Chair Powell, which has grown into a global concern. The Justice Department probe and public disputes have intensified questions about Fed independence, prompting strong support from major central banks worldwide.
Third, Powell’s term is ending in May, and therefore, the Fed leadership transition has become a key policy factor. The nomination of Kevin Warsh has added uncertainty, as investors weigh his recent dovish tone against his historically hawkish reputation.
All that to say, there is elevated uncertainty around future monetary policy, but for now, the likely path is a data-dependent and patient Fed.
Stocks
Certain equity market trends have seemingly shifted since the beginning of the year. US large cap markets have been the dominant stock market segment for years, but have lost some momentum in 2026. Both the mid-cap and small-cap markets have outpaced the large-cap market by a notable margin since the beginning of the year. It is unclear if this will be a sustained trend where wider market breadth begins to deliver total return for equity investors.
The foreign equity markets have continued strong outperformance relative to most US markets as we enter 2026. Further, the trailing one year total returns of most foreign equity markets are sizably larger than those delivered from the US markets. After such a long period of underperformance, foreign market outperformance relative to US stocks may have room to continue.
The overall commodity and energy markets have started the year strong as well. The gold markets in particular have been a major driver of returns in this space. Yet, overall, these diversifying asset classes can offer helpful risk and return characteristics when trying to diversify broader equity market portfolios.
Bonds
President Trump’s housing affordability plan aims to lower mortgage rates by having Fannie Mae and Freddie Mac buy $200B in mortgage-backed securities, compressing the spread between 30-year mortgage rates and 10-year Treasuries. Early results show some effectiveness, with spreads narrowing and average mortgage rates dipping below 6%, but the long-term impact remains uncertain. Overall, the policy highlights how balance-sheet demand can influence mortgage spreads as well as the mortgage backed segment of the bond market. Over the last year, mortgage-backed bonds have posted total returns of around 8.5%, outpacing almost every other major bond segment over that time.
Overall, the bond market has been quite flat since the beginning of the year. However, over the last year, the broad bond market has posted respectable returns. Corporate bonds, both high quality and high yield, have been some of the leading bond sectors over this time with total returns in the 7% to 9% range. Foreign fixed income has also performed very well over this time with returns in the 8% to 12% range. These returns have rivaled the long-term return expectations for certain equity markets.
As we progress through 2026, we believe that approaching certain bonds with caution is warranted. However, bonds are pivotal from an asset allocation standpoint for many investors; it is important to remain selective and intentional within the fixed income markets.
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The performance information presented in the asset category section of this report is based on equal-weighted averages of the following Morningstar Categories: US Stocks (US Fund Large Blend, US Fund Mid-Cap Blend, US Fund Small-Blend), Foreign Stocks (US Fund Foreign Large Blend, US Fund Foreign Small/Mid Blend, US Fund Diversified Emerging Mkts), US Bonds (US Fund Intermediate Government, US Fund Inflation-Protected Bond, US Fund Corporate Bond, US Fund High Yield Bond, US Fund Bank Loan), Foreign Bonds (US Fund World Bond, US Fund Emerging Markets Bond), Hard Assets (US Fund Commodities Precious Metals, US Fund Commodities Energy, US Fund Global Real Estate, US Fund Real Estate), Hybrid Assets (US Fund Convertibles, US Fund Preferred Stock).
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Bureau of Labor Statistics. Unemployment Rate, Total Nonfarm Employment, Labor Force Participation, Consumer Price Index, Producers Price Index. www.bls.gov. United States, Department of Commerce, Bureau of Economic Analysis. Personal Consumption Expenditures, Gross Domestic Product, Consumer Spending, Personal Income, and Outlays. www.bea.gov. Federal Reserve. Fed Funds Rate, Fed Funds Target Range, Minutes of the Federal Open Market Committee, Board of the Federal Reserve System Calendar. www.federalreserve.gov. Trump, Donald. @realDonaldTrump. Truth Social.
