February 2026
US Economy: Eyes on the base of the “Y”.
The US economy continues to show a divide where wealthier consumers are benefiting from AI driven market appreciation and still driving consumption whereas the base of the “Y”, lower income consumers, are facing slowing wage growth and affordability challenges. Continued growth in the US economy likely depends on productivity (+4.9% Q3) expanding to the base while wealthy consumer spending continues and the labor market stabilizes.
US Stocks: Mag 7 or Mag 1 to 2?
Magnificent 7 fortunes have started to diverge with Google and Nvidia well outpacing the others in 2025 and only Amazon and Google up in January. Microsoft tumbled roughly 10% in one day after investors were spooked by slower earnings growth and record high capex, highlighting how sensitive markets may be to earnings misses. However, if investors are becoming more discriminating and moving capital to less richly valued sectors, it may be a good sign for the equity market’s health.
Foreign Stocks: And now for my next trick…
International equities outpaced US equities over 2025 and did so again in the first month of 2026. For more than a decade, investing abroad has been challenging for US based investors even though the category has had its moments. The question is, does the recent run of performance have legs? Global trade momentum and increased cooperation between non-US countries (see Europe’s historic trade deals with India and Mercosur as examples) may continue to provide support for non-US equities.
Fixed Income: Treasury yields rise in early January.
The 10-year US Treasury yield inched upwards to 4.3% on better-than-expected economic data and the announcement that Kevin Warsh would become the next Fed Chair in May. Fed independence has been a simmering concern for investors but Warsh, historically known as an inflation hawk when he was a Fed governor, may have tamped those down for now. His appointment may also mean any near-term Fed support will be focused on rate cuts given his opposition to Fed balance sheet expansion.
Real Assets: Gold, Crypto tumble late.
While the spot price of gold finished higher for the month, a roughly 14% selloff that occurred in the final few days into February was notable. Technical factors relating to margin and gold being a “crowded trade” contributed to the unwind, but Warsh’s nomination may also have caused investors to lock in gains. Likewise, digital assets including Bitcoin (-20%) saw a quick negative reversal in a move that may signal limited diversification value.
Alternatives: Know what you’re buying.
2025 featured returns somewhat better than bonds for many hedge funds although some more equity sensitive strategies posted incredible results. It may seem counterintuitive but strong returns in the backdrop of an equity bull market can be a sign of hidden equity risk in a strategy. When incorporating hedge funds, the objective is equally one of risk-reduction as it is one of return generation. Investors should make sure they’ve incorporated the right mix of strategies to that end.
Source of data: Bloomberg
Equities Total Return
| JAN | 3 MO | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 1.4% | 1.7% | 16.3% |
| U.S. Small Cap | 5.4% | 5.8% | 15.8% |
| U.S. Growth | (1.3%) | (3.5%) | 14.3% |
| U.S. Value | 4.6% | 8.1% | 15.8% |
| Int’l Developed | 5.2% | 9.0% | 31.2% |
| Emerging Markets | 8.9% | 9.4% | 42.8% |
Fixed Income Total Return
| JAN | 3 MO | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 0.1% | 0.6% | 6.8% |
| TIPS | 0.3% | 0.1% | 6.0% |
| U.S. High Yield | 0.5% | 1.6% | 7.5% |
| Int’l Developed | (0.0%) | (1.2%) | (1.0%) |
| Emerging Markets | 0.3% | 0.3% | 3.7% |
| Tax-Exempt | |||
| Intermediate Munis | 0.9% | 1.3% | 5.4% |
| Munis Broad Mkt | 0.7% | 1.1% | 4.4% |
Non-Traditional Assets Total Return
| JAN | 3 MO | 1 YR | |
|---|---|---|---|
| Commodities | 10.4% | 13.5% | 22.9% |
| REITs | 2.8% | 2.9% | 4.1% |
| Infrastructure | 5.1% | 7.8% | 25.9% |
| Hedge Funds | |||
| Absolute Return | 1.0% | 1.9% | 5.6% |
| Overall HF Market | 2.2% | 2.8% | 8.3% |
| Managed Futures | 6.6% | 8.1% | 5.8% |
Economic Indicators
| JAN-26 | OCT-25 | JAN-25 | |
|---|---|---|---|
| Equity Volatility | 17.4 | 17.4 | 16.4 |
| Implied Inflation | 2.3% | 2.3% | 2.4% |
| Gold Spot $/OZ | 4894.2 | $4002.9 | $2798.4 |
| Oil ($/BBL) | $70.7 | $65.1 | $76.8 |
| U.S. Dollar Index | 119.3 | 121.8 | 128.7 |
Our Take
Just one month into the New Year and, though the fundamentals haven’t changed and the net financial market results were positive, momentum seems to have shifted a bit: January was marked by a handful of high-profile departures from the trends of last year. Chief among them, greater investor scrutiny over the near-term path for the large tech stocks that have routinely dominated the financial market narrative in recent years. At the same time, small cap stocks, which had been left in the dust in the AI focused rally, surged in January and have now quietly posted similar returns in the last 12 months, which may be emblematic of the flywheel of AI productivity growth taking hold beyond the tech sector. Meanwhile, a modest surprise in anticipated Fed leadership was enough to bring gold and digital assets back to earth.
As public equity markets have surged in the last few years, we have pointed out that markets characterized by such enthusiasm and concentration become increasingly subject to swift corrections. At this point, market participants appear to be assuming a smooth transition to a lower inflation, stable growth, and robust earnings environment — a scenario that is historically rare and could spark additional volatility if expectations are unmet. Whether fortunes do change for the darlings and dregs of 2026 is anybody’s guess, but the change in risk-sentiment is worth noting.
Timing the when and how of market shifts is borderline impossible and disciplined rebalancing is fundamental to long-term success. That said, we design portfolios with structured flexibility: A strategic foundation for long-term goal achievement but nimble enough to take advantage of opportunities when they present themselves. Today, we think those opportunities are challenging to find and require creativity as periods of prolonged elevated inflation and high market participant consensus are often marked by greater correlation amongst assets and more volatility. We also believe calibrating the amount of risk relative to your goals and tolerance for downside risk is paramount.
In practice what that means is recognizing that an asset class such as fixed income that has historically been our best diversification might not be as reliable as it has been in the past What could be solutions? In traditional assets, the continued resurgence of non-US stocks has rewarded a global approach while ultra-short fixed income may still provide a healthy risk-adjusted yield and some protection if rates slip upward. More creatively, diversifying asset classes such as hedge funds, private credit, real assets, and possibly even digital assets, when properly positioned, could all flourish if investor optimism misses the mark.
