Not investment advice.
We are going to get a tightening in monetary policy, which is bad for assets. Inflation, as shown below, is around 4% in the US and 3% in Europe and is going higher due to the war in Iran and the resulting higher energy prices. It is increasingly clear that whatever resolution comes in Iran will take a long time, so oil prices remain elevated.
Tightening is generally bad for assets. Below I show the S&P index alongside the Fed Funds rate in 2022. Stocks fell around 15% the last time this happened.
Tech stocks may well correct but will go back up because we are in a productivity boom and
a) prices are rising at the same time as earnings, so stocks aren’t yet that expensive,
b) U.S. households keep buying, and
c) some managers are short indexes and get squeezed, so they buy to cover, driving prices up.
Bonds go down, however, because:
a) nominal growth is around 7 percent while bond yields are well below 5 percent,
b) households don’t buy as many bonds as they do stocks,
c) the government is running a big budget deficit,
d) the tariffs were judged illegal and the government now needs to refund the revenue it collected,
e) the US is in a war with tactical victory but strategic defeat, which requires yet more money,
f) the new Fed chief is probably reluctant to hike rates, boosting the risk premium on longer-dated bonds amid an increasing lack of confidence in US institutions (like what happened to UK bonds), and
g) capex booms require debt.
Currencies in the short term will be driven by oil and the Fed. Elevated oil prices are bad for the euro and yen but good for Brazil and Norway; a Fed tightening shifts the pressure to more dollar bullish. Tightening is generally bearish for precious metals like gold, silver, and copper. European central banks are already discounted to tighten, but in 2026 the Fed is not.
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