Four key market signals to watch

Writing weekly commentaries on an airplane is much easier with noise‑cancelling headphones. Flip the switch and all the noise disappears. You’re left with the clarity to focus on what matters. An analogy to markets today is apt. The cacophony is deafening, and investors are struggling to distinguish what market signals matter from what merely sounds urgent.

This year alone, we’ve navigated Venezuela, Iran, questions about the independence of the Federal Reserve (Fed), and even the US possibly acquiring Greenland. The Geopolitical Risk (GPR) Index has been elevated and rising.¹ Yet history reminds us that peaks in geopolitical risk have often been buying opportunities, not exit signals.² For instance, investors who bailed after Liberation Day learned that lesson the hard way, missing April 9, 2025, the third‑best day for the S&P 500 Index in the past 30 years.³ We know what happens when you miss the best days.

So, what deserves attention now? Listen to the market.

Four key market signals to watch

1. Corporate-bond spreads tightened.⁴ Yes, tightened. That’s typically not the behavior of a market bracing for imminent deterioration in stocks.
2. Transportation stocks continued to climb,⁵ suggesting momentum could be building in the US economy.
3. The US dollar weakened, but in an orderly, unremarkable fashion.⁶ Yes, the Danish pension fund’s upcoming sale of US Treasuries made news, but amounts to just $100 million in a $40 trillion market — statistically irrelevant.⁷
4. Three‑year inflation expectations jumped from 2.25% to above 2.50%.⁸ That bears watching. The move likely reflects concerns about tariffs on Europe or the political noise around Fed independence. But with Fed Governor Lisa Cook looking likely to remain in place, some of those fears may be eased. Rising inflation expectations are the one development that could legitimately alter market leadership if the Fed was no longer expected to cut rates this year, or worse, needed to tighten policy. But 2.5% inflation expectations still fall within what the Fed considers price stability. That’s not a flashing red light.

Sharply higher Japanese yields

While the world was focused on the World Economic Forum in Davos, Japanese government bond yields were moving sharply higher, driven by expectations of expanded fiscal support. We interpret this as a Bank of Japan that’s increasingly behind the curve and likely to tighten more aggressively. That could stabilize the yen and support our view that the US dollar has room to weaken against trading partners as the year progresses.

Navigating the volatility

Investors could get nervous with each jolt of turbulence, whether geopolitical, political, or monetary. Or they could do what seasoned travelers do and put the noise‑cancelling headphones on and focus on the destination! The better choice, in our view, remains the latter.

A solid economic backdrop,⁹ relatively stable inflation,¹⁰ and the increasing likelihood of global fiscal policy support, from Europe to China to the US, form a constructive environment for stocks, in our view.