Institute Alert

• Congress was unable to avoid a partial government shutdown by the January 30 deadline.
• The president and Senate Democrats struck a deal to complete the government’s funding through the end of the fiscal year (September 30), but the House of Representatives was on recess and cannot consider the bill until today.
• Congressional leaders and the president support the Senate bill
• The most notable market movements overnight are weakness in global equities (focused on Asia) and a modest rebound in the U.S. dollar and in Treasury prices (slightly lower yields).
• These market movements appear much more closely tied to sharp selling in precious metals markets since last Friday that we believe is profit taking in what has become a crowded market of gold buyers.

• Even if this shutdown should go more than a few days, we expect little economic or market impact.
• By comparison with the Oct. 1 – Nov. 12 shutdown in 2025, this time the government is already partially funded, there is bipartisan support for a bill (the Senate passed it by a 71-29 margin on January 30), and House leaders are set to consider the bill by the end of the day today.
• Also, different this time: An economic slowdown does not appear imminent. To the contrary, the economy is enjoying a strong economic momentum, and we expect additional growth supports through 2026.
• The Bureau of Labor Statistics may still postpone the January employment report, due on February 6, but financial markets should see little disruption from what should be a brief lapse in government funding.

• This shutdown changes none of our guidance (see details in the following section).
• As we wrote in our 2026 Outlook report, “Trendlines over headlines”, we prefer to look through day-to-day headlines to position portfolios for the economic strength we foresee this year.

The trends we see driving returns this year are measured (not aggressive) Federal Reserve (Fed) rate cuts, deregulation, continued corporate technology spending, and significant corporate and individual tax refunds. The first two should combine to lower business costs, while the latter two should raise revenue through increased business and household borrowing. We expect these trends to raise U.S. corporate earnings broadly across equity markets. Globally, we see a procyclical upswing underway. Strong, positive signals from shipping and transportation activity, copper outperforming gold, and the S&P 500 Index Consumer Discretionary sector outperforming the more defensive Consumer Staples sector so far this year.

We favor overweighting U.S. large- and mid-cap equities relative to strategic allocations and taking international equity allocations to neutral on market pullbacks. We also reiterate our favorable ratings on S&P 500 Index sectors Industrials, Financials, and Utilities. The Financials sector seems particularly oversold so far in 2026 and attractive for new cash. Realistically, we believe a procyclical bent should dominate, but we do not expect a straight line higher in equities this year. There is still room for political headline whiplash, in our view, and for investors to ask questions during earnings seasons. We’ll still look to take profits when valuations get extended and to rebalance into sectors that look attractive fundamentally and in valuation.

We also reiterate our fixed income guidance to stay underweight in short- and long-term fixed income. In our view, investors in short-term Certificates of Deposit (CDs) and money-market funds should consider that this past June the U.S. Centers for Medicare & Medicaid Services projected average annual health care inflation at 2.5% between 2026 and 2033. Ultra-short rates may only just cover that inflation but may not stretch to cover inflation in other necessities. In the long maturities, some yield volatility is likely, and the duration risk (price sensitivity to interest rate movements) remains material, so we favor new money into investment-grade maturities of 3-7 years, where yields are close to 10-year yields, but with much less duration risk.

On commodities, we still favor precious and industrial metals. Gold could be a useful hedge, if long yields spike higher. We think an allocation of 2%-3% to precious metals could be appropriate for clients of any risk tolerance and investment objective.

Volatility may continue in coming weeks, which is why we expect our guidance to remain nimble and to treat market pullbacks as opportunities to rebalance funds toward emerging favorites. The goal of rebalancing is to reduce exposure where prices have become the most extended and to recycle the proceeds into potentially better values. In this way, rebalancing seeks to reduce near-term risk and to look for new potential opportunities as we expect the S&P 500 Index to continue trending toward our 2026 year-end target range of 7400-7600, but not in a straight line. The process of rebalancing may be easier to do when one focuses more on the fundamental trendlines than on day-to-day headlines.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.

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