Above the Noise: Look beyond distracting headlines

Hall of Fame football coach Bill Parcells, during the New York Giants’ 1986 title run, was asked by a reporter if he was scared to play Washington for the third time. Parcells replied, “Let me tell you what I’m scared of: Snakes, spiders, and the IRS.”

I’m so often asked what scares me about the ongoing market advance that I’ve been tempted to borrow Parcells’ line.

Venezuela? A small economy.¹ Iran? Same.²

Federal Reserve (Fed) independence? It’s critical, but I won’t be concerned unless inflation expectations break meaningfully above current levels.³

Greenland? Tariffs? It’s not ideal, but we’ve navigated tariffs before. Following Liberation Day, a “yippie” bond market had the Trump administration pausing tariffs, and the S&P 500 Index posting its third-best one-day return in 30 years.⁴

So, what does scare me?

It’s not snakes and spiders. I’ll be concerned when signs emerge of excessive leverage building across the US economy, inflation expectations drifting meaningfully outside the Fed’s comfort zone, a clear rollover in economic activity, credit spreads blowing out, and bankers tightening lending standards.⁵

None of that’s happening today.

Until it does, I remain bullish on stocks, despite the incessant noise in the headlines and the ongoing geopolitical maneuvering. 

It may be confirmation bias but…

… the much‑anticipated broadening of the US stock market does appear to be taking hold. This pattern is typical as the Fed eases policy and economic activity improves. Historically, during easing cycles, the equal‑weight S&P 500 Index (a proxy for broader market participation) has tended to outperform the market‑cap‑weighted index. (See chart below.) Early signs suggest this dynamic is emerging. Market cap has still outperformed equal weight over the past year, but that gap has been narrowing.⁶

It was said (part 1)

“Kevin’s too good on television to send to the Fed.”

—President Donald Trump⁷

President Trump’s recent comments about Kevin Hassett, long viewed as the perceived front‑runner for the Fed Chair role, effectively reopened the competition for the top job, with candidates such as Kevin Warsh and Christopher Waller emerging as leading contenders. Alas, my name still hasn’t appeared on any lists. I’m beginning to think I’m not in the running for the final rose!

As we’ve incessantly said, Fed independence remains critical. It has been modestly concerning to see inflation expectations drift higher in January, even if they’re within the Fed’s comfort zone.⁸ Investors should remember that the next Fed Chair will not wield unilateral control, because the governors generally lack deep political ties, the Biden‑appointed members remain in place, and Trump appointees like Waller and Michelle Bowman have been voting in line with the current Fed. This bears watching (pun intended!), as rising concerns over Fed independence represent the primary downside risk to our outlook. Nonetheless, we continue to expect the institution’s integrity to hold.

It was said (part 2)

“Europe owns Greenland, it also owns a lot of Treasuries.”

—George Saravelos, Deutsch Bank FX Strategis⁹

George Saravelos makes an interesting argument. There’s $3.5 trillion of US Treasury debt held in Europe, which is 9.8% of US outstanding debt.¹⁰ In fact, Europe owns far more than China, even though Chinese ownership of US debt has long been viewed as a powerful potential geopolitical tool.

It’s important to keep this in perspective, however. There’s not going to be a mass sale of US assets by European governments.

• First, most of the US assets held in Europe are owned by the private sector, including insurance companies, pension plans, banks, and individual citizens. (The Danish pension fund announced that it will divest itself of $100 million in US Treasuries, representing 0.4% of its account and 0.00026% of total US Treasury debt.¹¹)
• Second, they’d be selling against themselves, because it’s unclear who’d be willing to take the other side of such a trade.
• Third, the US remains the largest, deepest, and most liquid market in the world, which makes reallocating elsewhere extremely difficult.

The conclusion is that the current debate over Greenland doesn’t point to a sudden liquidation of US Treasuries. Instead, we maintain our view that investors will likely gradually diversify away from US assets, which suggests continued weakness in the US dollar. This supports our expectation that international assets will likely outperform in 2026.

Think/rethink

Think: Geopolitical events have a meaningful impact on the stock market.

Rethink: The average one-year return of the S&P 500 Index following a peak in the Geopolitical Risk Index is 15.40%.¹²

Phone a friend

Why are Japanese bond yields surging, and should investors be concerned? I posed the question to Rob Waldner, Chief Strategist and Head of Macro Research for Invesco Fixed Income. His response:

“Japanese bond yields¹³ have jumped on the back of a much larger‑than‑expected fiscal package and fears that the Bank of Japan (BoJ) has been too slow to raise rates, despite the December rate hike. Prime Minister Sanae Takaichi’s stimulus, equivalent to nearly 3% of gross domestic product (GDP),¹⁴ raised concerns about increased bond issuance and future fiscal expansion, pushing yields higher.

Markets now view the central bank as behind the curve, a perception reinforced by the unusual combination of rising rates and a weak currency.¹⁵ This dynamic is likely to be resolved, but will likely entail increased market volatility, including further increases in Japanese bond yields, until the BoJ is forced to tighten more aggressively. That would then likely be followed by stabilization and a rally in the yen.”

On the road again

My travels took me to Phoenix, where I was on an agenda with the technology and science writer and CBS News Correspondent David Pogue. David’s session focused on artificial intelligence (AI), and while he acknowledged the many concerns surrounding tech, he reminded us that society has always feared new innovations. Remember when it was believed that traveling 50 miles per hour on a steamship would drive a person mad?

David made clear that although AI will bring challenges that require thoughtful regulation, the potential benefits are likely to be extraordinary. He delivered on his promise to end with mind-blowing examples, ranging from AI interpreting a confusing parking sign to David Beckham appearing in an advertisement speaking multiple languages he doesn’t know.

But the example that truly struck me was Google AI releasing structural predictions for nearly 200 million proteins known to science. When you know the structure of a protein thought to be involved in disease, it increases the probability of discovering a drug molecule that will bind to it and alter its behavior, hopefully curing or mitigating the disease. Before this breakthrough, it’s estimated that scientists had known the structure of only 0.085% of all known proteins. David believes this development will unlock transformational medical breakthroughs, including treatment and cures for many of the most debilitating illnesses.