Navigating a More Uncertain Environment
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Over the past year, markets were supported by steady economic growth, easing inflation, and strong equity momentum. That backdrop is beginning to change.
Today, we’re seeing a transition from a strong, stable environment to a more uncertain and uneven one. This shift is being driven by three forces:
- Geopolitical tensions (particularly the recent Iran conflict)
- Persistent inflation and shifting interest rate expectations
- Deteriorating market internals beneath the surface
Individually, none of these would necessarily derail markets—but together, they are enough to warrant a more balanced and cautious stance.
The Economy: Softening
The U.S. economy entered the year on relatively stable footing. Manufacturing activity has been improving modestly, with industrial production rising for four consecutive months and showing better momentum than we’ve seen in over a year.
Inflation, before the Iran war, had been cooling with excess production capacity and easing price pressures across the economy. That stability is now being tested.
The conflict in the Middle East has introduced a new layer of uncertainty, particularly through higher oil prices and potential supply chain disruptions. These types of shocks tend to slow economic growth while also putting upward pressure on inflation—a difficult combination for markets.
Housing is another weak spot. Builder confidence remains firmly below normal levels, suggesting that new construction and housing activity are likely to stay soft in the near term.
In short: The economy is still growing, but momentum is slowing and risks are rising.
The Federal Reserve: Likely Waiting, Watching Carefully
The Federal Reserve is in their “wait-and-see” mode.
Inflation data has been mixed. Some measures show prices running slightly high, while others suggest underlying inflation is cooling. Meanwhile, the labor market is also mixed with job growth is slowing, but unemployment remains low.
Because of uncertainty in the labor market, the Fed is unlikely to make any immediate policy changes. What matters most right now are inflation expectations - essentially whether consumers and businesses believe inflation will stay under control. We expect the flow of oil and gas through the Strait of Hormuz to remain impeded for the foreseeable future. Overall, macro-inflation looks reasonably stable, allowing the Federal Reserve the latitude to be patient.
There are emerging concerns, however:
- Growth is expected to slow modestly
- Unemployment may drift slightly higher
- Energy prices may drive inflation higher
Markets: Signals of Deterioration Beneath the Surface
While headline stock indexes may not reflect it, underlying market conditions have weakened. Several internal indicators—such as market breadth (how many stocks are participating in gains) and momentum—have deteriorated meaningfully. In simple terms, fewer stocks are driving returns, and the broader market is losing strength.
The data suggests that markets had already been showing signs of fatigue, and recent geopolitical developments simply accelerated the trend.
Another notable development: global markets have lost momentum. The percentage of international markets in uptrends dropped sharply, largely due to geopolitical concerns.
Markets appear more fragile, even if major indexes aren’t reflecting it.
Interest Rates & Credit: A Subtle but Important Shift
One of the more important (and less visible) developments is what’s happening with interest rates.
The yield-curve is flattening as expectations for Federal Reserve rate cuts have declined. Short-term rates are now rising faster than long-term rates.
This typically precludes slower economic growth. Banking sector profitability expectations are being reduced.
Private Credit also shows signs of strain:
- Some funds are restricting withdrawals
- Concerns are emerging about liquidity and valuations
- Banks may have indirect exposure through financing
We will be watching these credit markets closely because when stressed, they can spill into the broader economy.
To summarize, financial conditions are tightening gradually, even without aggressive Fed action.
What This Means for Investors
- Growth is slowing, but still positive
- Inflation is moderating, but war will drive energy prices in the near term
- Markets are losing some internal strength
- Risks—both geopolitical and financial—are increasing
The financial market’s reaction to the latest middle east instability has been mostly measured. We believe this reflects an overall level of investor confidence in the global economy. Markets will likely remain news-driven in the near term, especially around geopolitical developments. A quick resolution in Iran or Ukraine could improve sentiment, while escalation in either conflict could increase volatility.
Our diversified investment portfolios are constructed to weather ongoing expectations for a choppy 2026. “Noise levels” are certain to remain elevated. Please contact us with questions or comments.
For a look at our 2026 Outlook, check out our last Market Commentary here: https://www.pacwealth.com/blog/2026-market-economic-outlook
Taxes are likely the focus during this time of year, here is a helpful list of documents you might need for tax time:https://www.pacwealth.com/blog/which-tax-documents-do-i-need-1