- Multiple monetary and fiscal policies and other external factors on the horizon in 2026 have the potential to stimulate the economy with cash and easier borrowing conditions. While their directional impacts, especially on financial markets, remain to be seen, it’s important to be aware of them.
- One, Big, Beautiful Bill Act: The new legislation package passed last year will begin to have noticeable impact on consumers and businesses in 2026, as we are expected to see record tax cuts and refunds, putting hundreds of billions of dollars back into the economy. If these extra funds are used quickly, we can expect to see additional business investment and consumer spending.
- End of Quantitative Tightening, Fed Expected to Expand Balance Sheet: The Federal Reserve has officially stopped selling securities from its balance sheet, taking money out of the economy, and has recently began purchasing securities again, putting money back into the economy.
- Further Rate Cuts: The market is currently pricing in between one and three more 25bps rate cuts in 2026. Exactly how many cuts will likely start to become clearer with more economic data and the announcement of who the next Fed Chair will be, but we can expect to see at least some more downward movement at the front end of the curve this year.
- New Government Spending Initiatives: President Trump has recently argued that the defense budget should be increased from $1T to $1.5T to continue building out military resources. He also announced his intent to purchase $200B in mortgage bonds, seeking to bring down mortgage rates. This expansionary fiscal policy will likely also have a stimulative effect on the economy.
- Tariff Dividends: While unconfirmed, President Trump has indicated his intent to issue "tariff dividends" upwards of $2,000 to U.S. citizens, providing a potential boost to consumer savings and spending. Treasury Secretary Bessent clarified that this dividend could come in a few different forms, including stimulus checks or more tax cuts, so this is something we'll be monitoring throughout the year.
- Easier Credit Conditions: The High Yield Market Distress Index, which measures the difficulty for high yield issuers to obtain credit, is at all-time lows. The credit market appears to be healthy and supportive of continued business spending activities.
- Keep in Mind:
- Increased business and consumer spending is broadly positive for the economy and financial markets, all else equal.
- We’ll need to keep an eye on inflation and the 10Y Treasury yield. Higher rates tend to be bearish for equities, and a data-driven change in outlook could send stocks lower.
- It’s important to be aware of external factors that may move the economies and markets, but their impacts remain to be seen. We believe staying disciplined and diversified is key to long-term investing success.
- Increased business and consumer spending is broadly positive for the economy and financial markets, all else equal.
