The risk appetite in the bond market has picked up this year as investors grow more comfortable with the economic outlook and the path of interest rates. A set of bond ETFs through yesterday’s close (Feb. 24) highlights a clear trend so far in 2026: favoring government securities with longer maturities has been a winning strategy.

Long‑dated Treasuries continue to lead by a comfortable margin year to date. The Vanguard Long‑Term Corporate Bond ETF (VCLT) is up 3.5% so far this year. In second place is the iShares 10–20 Year Treasury Bond ETF (TLH), posting a 2.8% year‑to‑date gain. On both counts, returns are far ahead of the U.S. investment‑grade fixed‑income benchmark, represented by the Vanguard Total Bond Market ETF (BND), which is up 1.5%.

The lone loser: bank loans (BKLN), which have slumped 2.0% this year. The ETF is getting hit amid heightened concerns about credit risk in leveraged loans. The pain is especially acute in the software industry, which is considered vulnerable amid rise of artificial intelligence. With nearly one‑fifth of BKLN’s portfolio exposed to software, the fund has taken a beating as the credit health of the industry has come under scrutiny.

Investors are asking: Does AI pose an existential crisis for software companies?

“The question is if [AI] agents and new platforms are interacting with existing software or replacing them,” says Jim Tierney, head of US growth investment at AllianceBernstein. “I’m leaning more to the former. What becomes the system of record for a business? It is unlikely to be a half dozen new vendors.”

As the crowd sorts out the answer, buying longer-dated Treasuries is in vogue. A key part of the reasoning is that inflation looks less threatening while the market is anticipating that the Federal Reserve will keep rates steady before resuming cuts in June, based on Fed funds futures. Add in the slowdown in economic growth and a downshift in hiring and conditions have been supportive for taking more risk in government bonds.

If one or more of those pillars shifts, the surge in the risk appetite for Treasuries could stumble. Fiscal risk is another potential source of anxiety for government bonds vis-à-vis a worrisome outlook for an already hefty federal budget deficit.

For the moment, however, the party continues as the bond market goes all-in on long Treasuries.

US economic growth posted a sizable downside miss in Friday’s fourth-quarter GDP report, but early Q1 nowcasts point to a rebound.

One theory for why output fell short of expectations in Q4 centers on the government shutdown in October. According to the Bureau of Economic Analysis, government spending subtracted nearly a full percentage point from headline GDP’s 1.4% annualized increase, marking a sharp downshift from Q3’s robust 4.4% increase.

A back-of-the-envelope estimate suggests that removing the 0.9 percentage point reduction in government spending (the deepest quarterly slide in six years) would have raised growth to the low 2%-plus range, just below the consensus forecast of 2.5%.

“The federal government shutdown clearly sent the economy careening off its strong growth path in the fourth quarter which is a one-off that won’t be repeated in early 2026,” said Chris Rupkey, chief economist at Fwdbonds.

Several nowcasts for Q1 agree, including the Atlanta Fed’s GDPNow model, estimating a 3.1% increase for GDP in the first three months of 2026 (as of Feb. 20). The New York Fed’s Q1 nowcast also reflects a recovery, albeit a softer one at an estimated rise of roughly 2.4% (Feb. 20).

Economic activity tracked by the Dallas Fed’s Weekly Economic Index indicates that the growth trend in recent history remains intact midway through Q1. The WEI rose to 2.58 through Feb. 14, the highest since August – a reading that’s above the pace of year-over-year GDP growth in 2025.

The key takeaway: The slowdown in Q4 growth doesn’t appear to be a warning flag for the economy. Although economic activity has probably slowed relative to the strong GDP increases in last year’s second half, the latest numbers point to moderate growth in the near term.

As usual these days, there could be several jokers in the deck that shock the otherwise upbeat outlook. Among the risk factors lurking at the moment: macro uncertainty following Friday’s ruling by the Supreme Court that President Trump’s tariffs are illegal and the threat of a US strike on Iran. Absent serious, sustained blowback from those events, however, the outlook still points to moderate growth for the near term.

The resilience of global markets will be tested anew this week as investors grapple with the implications of three risks that could roil sentiment: slower economic growth, the Supreme Court’s ruling that President Trump’s tariffs are illegal, and the threat of a US strike on Iran.

Let’s start with the US economy, which posted sharply slower growth in Friday’s fourth‑quarter GDP report. Output rose 1.4% — roughly half the pace expected and far behind the much stronger increases of 4.4% and 3.8% in the third and second quarters, respectively. The government shutdown was a key factor that weighed on economic activity and was estimated to have reduced growth by a percentage point.

The economy probably cooled even without the shutdown, but the slowdown was exaggerated in the official Q4 numbers. “The core of the economy is resilient,” said Michael Pearce at Oxford Economics. “With tariff pressures fading and tax cuts beginning to fuel an increase in capital spending, the economy will gather momentum in 2026.”

The initial nowcast for Q1 GDP points to a robust rebound, according to the Atlanta Fed’s GDPNow model, which is projecting a 3.1% increase. Sentiment in betting markets this morning is on board with the outlook: a 60% probability is currently priced in for Q1 growth of 3.0% or higher, according to Polymarket.

The economy may be stronger than it appears in the Q4 data, but uncertainty for trade policy spiked on Friday after the Supreme Court ruled that Trump’s import taxes were illegal. The President quickly countered that he would use another provision to impose a 15% tariff on all foreign goods coming into the country. But the whirlwind of trade‑policy news since Friday raises several questions that will take time to answer. Among the new issues raised:

* Trump’s new tariffs draw on authority from Section 122 of the Trade Act of 1974, but the provision limits how long tariffs can be imposed by the President — 150 days. Congress can extend the limit, but the unpopularity of tariffs in an election year looks like a hard sell for politicians seeking re‑election.

* Meanwhile, Trump said the administration will launch several investigations to address what it views as unfair trade practices by other countries and companies, drawing on the authority of Section 301 of the Trade Act of 1974.

Exactly how all this unfolds, and what it means for tariffs and trade, will remain a work in progress. One implication: the patchwork of trade deals the White House has negotiated with various countries now looks null and void as a sweeping, if temporary, 15% levy takes effect.

Meanwhile, the Supreme Court ruling on Friday implies that companies that paid tariffs over the past year are due refunds — $175 billion, by some estimates — a bill that would further deepen the federal government’s already steep budget deficit.

The more immediate threat for risk sentiment is the potential for a US attack on Iran. Trump is pressuring Iran over its nuclear program and has moved an array of military assets into striking range to intimidate Tehran. Talks between American and Iranian negotiators continue, but it’s not clear that Iran will capitulate — at least not to a degree that satisfies Trump.

In an interview on Sunday, Steve Witkoff, the President’s special envoy, said:

“I don’t want to use the word ‘frustrated’… because he [Trump] understands he’s got plenty of alternatives, but he’s curious as to why they haven’t… I don’t want to use the word ‘capitulated’, but why they haven’t capitulated. Why, under this sort of pressure, with the amount of sea power and naval power that we have over there, why haven’t they come to us and said, ‘We profess that we don’t want a weapon, so here’s what we’re prepared to do?'”

Some analysts fear that a US attack could trigger a wider regional conflict as Iran lashes out at its neighbors that host American military bases.

“For Iran, submitting to U.S. terms is more dangerous than suffering another US strike,” said Ali Vaez, the Iran director of the International Crisis Group. “They don’t believe that once they capitulate, the US will alleviate the pressure. They believe that would only encourage the US to go for the jugular.”

Markets now face a convergence of economic, legal, and geopolitical shocks that could easily destabilize sentiment if any one of them worsens. With growth slowing, trade policy in flux, and the risk of military escalation rising, the task of pricing in an uncertain future isn’t getting any easier.

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● Mastering Gold and Silver Markets: Insights from a Legendary Bullion Bank Trader
Robert Gottlieb
Summary via publisher (Wiley)
In Mastering Gold and Silver Markets: Insights from a Legendary Bullion Bank Trader, veteran precious metals trader, Robert Gottlieb, delivers an insightful blend of memoir and education that covers the world of bullion trading from a banker’s perspective. The book covers his journey from working at a certified public accounting firm to his position as the Global Head of Precious Metals Trading and Sales at many of the largest bullion banks in the world. Gottlieb dives deep into the critical role played by bullion banks in the global precious metals ecosystem. He provides a detailed explanation of financial and futures markets and how they facilitate liquidity and hedging strategies for their clients.

● Made in America: The Hidden History of How the U.S. Enabled Communist China and Created Our Greatest Threat
Xi Van Fleet and Yu Jie
Summary via publisher (Hachette/Center Street)
From the acclaimed author of Mao’s America comes the untold story of how misguided and selfish U.S. elites transformed China from a Communist wasteland into a global superpower—at America’s expense. One of the most effective anti-communist voices in America today, Xi Van Fleet made waves with her breakout book Mao’s America, exposing eerie parallels between China’s past and America’s present woke revolution. Now, alongside renowned Chinese dissident Yu Jie, she sounds the alarm once more—revealing how the CCP’s rise was not just enabled by Soviet Russia but, shockingly, by the United States itself.

● The Intelligent Crypto Investor: A Simple Strategy for Building Wealth in a New Financial World
John Hargrave
Summary via publisher (Wiley)
Crypto just crossed the tipping point, and everything you thought you knew about investing is about to change. The world’s biggest institutions are pouring billions into bitcoin—while most mainstream investors are still sitting on the sidelines, frozen by fear. That’s where The Intelligent Crypto Investor comes in. Backed by seven years of real-world results, this groundbreaking book shows how adding just a small slice of crypto (10% or less) to a balanced portfolio can dramatically improve long-term returns—outperforming traditional portfolios by more than 65%. Through the stories of legendary investors like Warren Buffett, Jack Bogle, and Cathie Wood, bestselling author John Hargrave unveils a clear, accessible strategy for adding bitcoin and other high-quality crypto assets to your portfolio—with minimal risk and maximum intelligence.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

CAPE Ratios and Long-Term Returns
Rui Ma (La Trobe University), et al.
January 2026
We demonstrate that 10-year equity market returns are considerably more predictable in relation to price-earnings ratios than previously thought. The traditional approach involves relating the current index price level, based on current index components, to the index earnings of previous years, calculated using those years’ components. When we estimate the cyclically adjusted price-earnings (CAPE) ratio, ensuring that index component prices and earnings are aligned, and apply a superior regression approach, out-of-sample R 2 values are over 50%. The Component CAPE ratio weights individual stock CAPE ratios by their market capitalization, whereas the traditional CAPE ratio is more closely aligned with earnings weighting.

Multiples for Valuation: Go High, Go Low, Ignore the Middle
Javier Estrada (IESE Business School)
February 2026
Multiples such as D/P, P/E and CAPE have long been viewed as being useful to forecast returns over periods of ten or so years. The evidence discussed in this article supports this belief and takes it one step further by showing that multiples are far more useful when they are relatively high or low than when they are somewhere in the middle of their historical range. In fact, relatively high or low multiples are more highly correlated to forward returns in sample, and produce better return forecasts out of sample, than multiples that lie somewhere in the middle.

Credit Spread News and Financial Market Risk
Fabrizio Ghezzi (University of California San Diego)
December 2025
This paper shows that credit spread news, defined by changes and absolute changes in corporate bond credit spreads, predict a substantial share of future variation in financial market risk. I first document a strong and robust predictive relationship between credit spread news and financial market risk. I then investigate the economic mechanism underlying this relationship and provide both theoretical and empirical evidence highlighting a central role for financial intermediaries’ risk expectations. Together, these findings establish credit spread news as statistically significant and economically meaningful predictors of financial market risk.

Mean-Reversions in the Debt-to-GDP Ratio and Predictability of Treasury Debt Returns and Surpluses
Deshui Yu (Hunan University), et al.
November 2025
The debt-to-GDP (DG) ratio should predict Treasury returns and primary surpluses according to the present-value identity, yet empirical support remains elusive. This paper resolves this puzzle by decomposing the DG ratio into a slow mean-reversion component and a local mean-reversion component. We show that the local mean-reversion of the DG ratio delivers substantially improved out-of-sample forecast gains of Treasury debt returns and surpluses, outperforming the original DG ratio, the historical average benchmark, and the adjusted ratios subject to structural breaks. In contrast, the slow mean-reversion component obscures predictive information by incorporating persistent, non-fundamental variation. Our findings are robust to alternative decomposition methods and DG ratio definitions (including nonmarketable debt). We develop a revised fiscal present-value model to rationalize the findings.

Extracting Forward Equity Return Expectations Using Derivatives
Steven P. Clark (University of North Carolina at Charlotte), et al.
January 2025
This paper develops a framework for extracting conditional expectations of future equity returns from derivative prices. We show that expected returns can be identified not only at the spot horizon, but also for forward-starting investment periods, yielding the full surface of expected future returns. Using index options, we derive theoretical bounds on future returns, and using VIX derivatives, we link risk-neutral and real-world expectations. Empirically, derivative-implied expectations exhibit sharp shifts around major crises, reveal persistent negative dependence between adjacent monthly returns, and generate economically valuable reversal signals. These findings uncover new dimensions of return predictability embedded in derivatives markets.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno

The US economy is on track to report a third straight quarter of growth in tomorrow’s delayed GDP update for Q4, based on the median of a set of nowcasts compiled by The Capital Spectator. The pace is expected to slow from Q3, but the increase will be strong enough to keep last year’s chatter about recession on the fringes of economic analysis.

Today’s revised estimate shows output in the previous quarter rose 2.7% at an annualized rate for GDP, unchanged from the previous estimate. If this median nowcast is accurate, growth will downshift from Q3’s strong 4.4% advance, which marked a two-year high.

An encouraging sign is the relatively steady run of median nowcasts lately, following several upward revisions. Nearly a month ago, the median estimate was 2.1%, which was revised up earlier this month and is holding at 2.7% ahead of tomorrow’s release from the Bureau of Economic Analysis.

The widely followed GDPNow estimate from the Atlanta Fed remains the upside outlier, currently nowcasting a 3.6% increase. Using this outlook as a guide in context with our median nowcast implies that a high-2%-to-low-3% increase is a reasonable assumption for tomorrow’s release.

Although the top-line measure of economic activity is expected to chug along at a solid pace for a third straight quarter, there are growing concerns about the so-called K-economy effect – a reference to an uneven economy across sectors and households. For example, a substantial gap in consumer sentiment has opened up between consumers with equity investments compared with households with little or no stock holdings. “Sentiment surged [in February] for consumers with the largest stock portfolios, while it stagnated and remained at dismal levels for consumers without stock holdings,” survey director Joanne Hsu said.

The gap between high and low earners “leaves the economy much more sensitive,” said Samuel Tombs, chief US economist at Pantheon Macroeconomics. “It’s almost like the stock market is the tail that’s wagging the dog of the economy,” added Emily Roland, co-chief investment strategist at Manulife John Hancock Investments.

The implication: a sharp fall in the stock market could have outsized effects on the economy. That’s a risk for 2026, but the threat is expected to remain muted in tomorrow’s GDP update.

Is Recession Risk Rising? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report

Consumer inflation was softer than expected in January, but the news hasn’t changed the market’s outlook for the Federal Reserve to keep its target interest rate steady until June. But the bond market looks poised to test challenge the timetable by pricing in an earlier rate cut.

On Friday, the government reported the consumer price index (CPI) rose 2.4% for the year through January, easing from 2.7% in December, dropping to an eight-month low. Core CPI, which strips out energy and food and is seen as a more reliable measure of the trend, also ticked lower, rising 2.5% from the year-earlier level, marking the softest pace since 2021.

The downshift is encouraging, but a closer look at the numbers beyond the top-level disinflation suggests caution is still warranted about inflation’s future path. Ongoing price increases in tariff-sensitive goods is one reason. Another is food inflation, which rose 2.9% year-over-year, which is high relative to the historical record. Energy prices posted an even sharper increase, as did homeowners and renters insurance prices. Another sign that the Fed will remain cautious is that the inflation is still running above its 2% target.

It’s still too early to declare victory, but as the broad price trend continues to ease there’s a case for arguing that the worst has passed. The Capital Spectator’s ensemble forecast for core CPI has been predicting ongoing disinflation for months, an outlook that has been more or less accurate, at least so far. The model continues to see core CPI’s 1-year trending lower, slipping to 2.4% for the upcoming February report.

The implied forecast via Fed funds futures is still pricing in no rate cut until the June policy meeting, but the Treasury market is testing the waters for an earlier round of cutting. The policy-sensitive two-year yield is currently 3.45%, close to the lowest level since 2022 and below the Fed’s 3.50%-to-3.75% range for its target rate.

Sentiment in the Treasury market, in short, is leaning into the view that a rate cut is nearer than expected. Other market-based metrics are also pricing in higher odds that disinflation will continue. The average of two Treasury market-based forecasts now estimates 5-year inflation in the low-2% range, the softest in a month and close to the Fed’s 2% target. The jump in expectations in January has now reversed, suggesting that the market has become less concerned with inflation risk in recent weeks.

Markets can be wrong, of course, but it would take a significant surprise in the economic data in favor of reflation to reverse the crowd’s disinflationary outlook. For the moment, markets aren’t inclined to take that bet.

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno

Getting ready to sell your home? If you’re like most folks, you want to squeeze every dollar possible out of your investment. But let’s face it: the process can be overwhelming and even a little scary. You might find yourself staring at peeling baseboards or that tired backyard fence and wondering, “Does this stuff even […]

Applying for a K-1 fiancé(e) visa is an exciting step for couples, but it can also bring a great deal of stress. There’s the emotional weight of being separated from your fiancé and wondering if everything will work out. There’s the practical challenge of gathering documents, filling out forms correctly, and tracking embassy timelines And […]

In line with recent history, the benchmark 10-year yield remained close to its “fair value” estimate in January, based on the average of three models run by CapitalSpectator.com.

The near-neutral pricing, reflecting a modest premium in the market rate, has been a feature over the past five months. Previously, the 10-year yield traded significantly above fair value for several years.

The premium in the market rate was 25 basis points in January, based on analytics using monthly data. That’s up slightly from December’s premium and marks a five-month high. Despite the modest increase, the current premium remains close to fair value and extends the recent shift toward a near alignment between the market rate and the average model‑derived theoretical value.

The track record of the deviation in the market rate vs. the average fair value estimate offers an implied forecast. The quasi-random behavior of the spread, as it varies around zero through time, suggests that the relationship between the market rate and fair value isn’t persistent. In turn, that implies that when the spread is relatively wide, either negative or positive, a mean reversion is likely at some point.

Timing is always uncertain, but the spike in the previous spread well above +1 percentage point inferred that the difference would narrow, either through a decline in the market rate, a rise in the fair value estimate, or some combination of both. In Oct. 2023, when the spread had reached a multi-decade high, CapitalSpectator.com wrote: “The spread is now at the 95th percentile, based on history since 1980. That implies that we’re near the peak [for the spread].”

More than two years later, the spread has dropped sharply and returned to a near-neutral level. The adjustment has been a function of a rising fair-value estimate and a falling 10-year yield, which closed last week at 4.04% (Feb. 13), which is nearly a full percentage point below the near-5% level the benchmark rate briefly approached in market trading in Oct. 2023.

By excecutive order, the world headquarters of The Capital Spectator is closed today. The usual consultations reconvene tomorrow (Tuesday, Feb. 17), and without the need for congressional approval. During the interregnum, check out this week’s edition of The ETF Portfolio Strategist, our sister publication. Meantime, I hereby veto any legislation to engage in work for the remainder of the day.

● Finding Value in Numbers: The Essential Investing Toolkit to Win on Wall Street
Ehsan Ehsani
Summary via publisher (Columbia U. Press)
To be successful as an investor, one needs a framework. And no investing framework works without numbers. Although quantitative methods can be intimidating, they provide a major boost to the quality of analysis. Written for readers without a technical background, Finding Value in Numbers is an engaging and practical guide to how thoughtful investors can use numbers—not just for the sake of crunching data but for making better decisions. Using a value investing perspective, Ehsan Ehsani shows how to deploy quantitative tools to identify and analyze investment prospects, demystifying the math that points to overlooked opportunities in the stock market, other securities, and beyond.

● AI Economics: How Technology Transforms Jobs, Markets, Life, & Our Future
Benjamin Shiller
Review via Fortune
The weirdest thing of all in economics, says Brandeis University Economics Professor Benjamin Shiller, is that weirdness is closely tied to fate in the age of artificial intelligence (AI). The weirder you are, he tells Fortune, the better off you’ll be.
In his new book “AI Economics: How Technology Transforms Jobs, Markets, Life, and Our Future,” Shiller, argues that the more bizarre your job, the less likely that AI will take it. A specialist in the economics of technological change—and the son of a famous economist in his own right, Yale’s Robert Shiller, the co-creator of a national home price index still in use today, Shiller tells Fortune that the future of employment is weird.

● How Africa Works
Joe Studwell
Review via The Economist
Africa is adding 300m people per decade: by 2050 it will be home to 2.5bn, a quarter of humanity. As the rest of the world ages, the continent’s youthfulness stands out. It will play a bigger role in the global labour market and as a source of consumers, culture and ideas. Thought-provoking new books about Africa are therefore sorely needed. In “How Africa Works” Joe Studwell, a visiting fellow at the Overseas Development Institute, a think-tank, has written one of the most interesting analyses of the past few years. It will prove valuable reading for anyone curious to understand “the last great frontier of global development”.

● Swiftynomics: How Women Mastermind and Redefine Our Economy
Misty L. Heggeness
Review via The New Republic
Dr. Misty Heggeness, a professor at the University of Kansas and former Census Bureau economist, released an analysis last year showing that mothers with young children were leaving the workforce after pandemic-era gains. It was a wake-up call that women with young children had benefited from the remote work–friendly policies and that some of the changes made by the Trump administration, like sweeping federal layoffs, had hit women hardest.
Heggeness had used long-available data from the Current Population Survey for her analysis, but took a unique perspective to understand what was happening to women in particular. Now she’s published a book that does the same. In Swiftynomics: How Women Mastermind and Redefine Our Economy, she replaces the economics discipline’s idea of a rational “Economic Man” with a rational “Economic Woman” to show how our economy is impacted by the care that women provide, the choices they make for their families, and their perseverance despite sexism and discrimination. And yes, her muse on this journey is Taylor Swift.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

Recession risk remains low, but the torrid pace of GDP growth in recent quarters is expected to downshift in next week’s delayed fourth-quarter report from the government, based on the median for a set of nowcasts compiled by The Capital Spectator.

Today’s update indicates a 2.7% annualized increase in GDP, unchanged from the previous estimate. If accurate, output will ease following from Q3’s 4.4% pace, a two-year high.

The upside outlier in the data sets in the chart above remains the Atlanta Fed’s GDPNow model. Note that the regional Fed bank’s nowcast has been revised lower in recent weeks and is currently estimating a 3.7% advance (as of Feb 10). That’s still a solid gain, but here too the view has cooled lately and that the economy is expected to expand at the slowest rate in the past three quarters.

Whatever next week’s numbers reveal, it’s likely that the Q4 data will confirm that the US ended 2025 with an economic tailwind. Analysis in our sister publication this week – The US Business Cycle Risk Report – highlights a persistently moderate growth pace through January, based on a broad set of business-cycle indicators.

Wednesday’s better-than-expected payrolls report for last month strengthens the view that the economy remains resilient, at least in relative terms. As a result, the recession warnings from some economists late last year still look wide of the mark.   

A low pace of layoffs via jobless claims data supports the view that the labor market is stabilizing after downshifting in last year’s second half.

There are several caveats to consider with the latest payrolls numbers, including downward revisions that show that hiring last year was substantially than previously estimated. Another issue: last month’s increase in payrolls was highly dependent on healthcare, which suggests that the cyclical parts of the economy could falter as the year rolls on.

“The surprisingly strong job gains in January were driven mainly by health care and social assistance,” says Heather Long, chief economist at Navy Federal Credit Union. “But it is enough to stabilize the job market and send the unemployment rate slightly lower. This is still a largely frozen job market, but it is stabilizing. That’s an encouraging sign to start the year, especially after the hiring recession in 2025.”

Another economist offers a similarly upbeat diagnosis: “The signal from the US labor market is that we’re nowhere near recession,” writes Robin Brooks, senior fellow at the Brookings Institution and former chief economist at Institute of International Finance. “There’s really no indication that the US economy is rolling over. If anything, the labor market says activity is picking up.”

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Predicting is hard, especially about the future, runs an old joke. Does the “wisdom” of crowds help? There’s a long line of research suggesting it does. Combining forecasts from several models, for example, has an encouraging track record of outperforming any one model as a general rule. The latest twist on this idea arises from betting markets. As researchers study these sites and compares their forecasts with the usual suspects, the results reaffirm the value of the crowd’s view.

A pair of recent working papers dives into the details. A study published last month from the National Bureau of Economic Research finds that the forecasts from Kalshi, an online betting market, offers forecasts that are “comparable” in accuracy to “established benchmarks such as the Survey of Market Expectations and the Bloomberg consensus.” The authors add:

In several cases, they provide unique insights—particularly for variables like GDP growth, core inflation, unemployment, and payrolls, for which no other market-based distributions currently exist. We have also argued that they provide the only credible measures of distributional beliefs about decisions at specific FOMC meetings.

Another group of economists studied earnings expectations from Polymarket and report:

Our analysis demonstrates that prediction markets are efficient aggregators of information: they significantly outperform sell-side analysts in predictive accuracy and possess significant incremental explanatory power for earnings announcement returns. Furthermore, while analysts systematically underestimate earnings and exhibit underreaction, prediction market expectations are unbiased in levels and largely consistent with rational benchmarks, though we do observe short-term overreaction. Finally, we show that prediction markets lead price discovery for earnings-related information, incorporating new information before analyst forecast revisions.

“Getting information from a large pool of people can be a remarkably good form of forecasting,” said Jonathan Wright, an economics professor at Johns Hopkins University who co-wrote the NBER paper.

With that in mind, let’s check in on the latest forecasts for several upcoming macro events, starting with the next month’s policy decision at the Federal Reserve. Echoing recent history, the crowd expects the Fed to leave rates steady.

For the delayed fourth-quarter GDP report scheduled for later this month, a moderate downshift to 3.2% is expected. That’s still in line with the two previous quarterly reports in suggesting that output will continue to increase at a robust pace.

Tomorrow’s consumer inflation report for January is expected to edge higher to a ~2.8% year-over-year pace, up from 2.6% in December.

Finally, on the question of whether the US stock market (S&P 500) will post a gain for all of 2026, the current view is a moderately confident “yes”:

Learn To Use R For Portfolio Analysis
Quantitative Investment Portfolio Analytics In R:
An Introduction To R For Modeling Portfolio Risk and Return
By James Picerno

Energy, basic materials, and defensive consumer stocks are in. Tech and financials are out. That, at least, is Mr. Market’s view so far in 2026, based on a set of US equity sector ETFs through yesterday’s close (Feb. 10).

Stocks in the energy patch continue to lead the field by a solid margin. The SPDR S&P Energy ETF (XLE) is up nearly 20% year to date. In addition to leading the other equity sectors, dramatically so in several cases, these shares have also left the broad stock market in the dust in 2026’s early going, based on the SPDR S&P 500 (SPY), which is up just 1.5% this year.

Following a lackluster performance in 2025, Big Oil and other energy stocks are roaring. One theory is that the Venezuela factor lit a fire for expectations. Following the removal of the country’s leader, Nicolás Maduro, by US forces on Jan. 3, the energy sector has been on a tear.

Coincidence? Maybe, although energy bulls argue that investors anticipate that a new governing regime in Venezuela could enable US companies to resume work on rebuilding the country’s oil infrastructure, creating new business opportunities in the process.

The degree of of opportunity remains debatable, but market sentiment for now seems to be leaning into the possibilities. Skeptics note that Venezuela’s political environment is historically volatile and even under the best of circumstances it will take years for Venezuela to recover its energy-output mojo.

Another risk: Companies may hesitate until they see durable legal protections. Exxon Mobil’s CEO last month told President Trump that Venezuela is “uninvestable” and the needs to transition to democracy before energy firms can rationalize investing in the nation’s degraded oil industry.

Posting a strong second-place performance this year: stocks in the materials sector (XLB). Holding a portfolio of mining stocks and other firms that focus on basic materials and chemicals, XLB has surged nearly 17% this year, nearly doubling its performance for all of 2025.

Tied for third place for sector results this year: consumer staples (XLP) and industrials (XLI). Each fund is currently higher in 2026 by 12%-plus.

Meanwhile, the formerly high-flying tech sector (XLK) and financials (XLF) are underwater this year.

It’s still debatable if the sharp change in sector leadership is a sign of durable trend for the foreseeable future, but for now Mr. Market’s attention has shifted in a non-trivial degree.

The economy feels like a tale told through fogged‑up glass lately. Pick the “right” indicators and you can argue almost any version of reality. Forecasts are always a little blurry, but this moment feels different — the numbers themselves seem to be hiding the plot.

Let’s start with a top-down view using GDP. To judge by the popular nowcast published by the Atlanta Fed, last year ended with a strong tailwind. The regional Fed bank’s GDPNow model is estimating that the delayed fourth-quarter GDP report (due on Feb. 20) will post a robust 4.2% annualized increase. If correct, the rise will mark three straight quarters of vigorous gains.

A timelier measure of the economic trend shows that the growth bias has carried over into early 2026, based on the Dallas Fed’s Weekly Economic Index (WEI). Last week’s report indicates that four-quarter GDP growth was holding in the 2%-plus range through Jan. 31, reflecting a moderate trend that’s in line with recent history.

The labor market, by contrast, paints a weaker profile for economic activity. Several updates last week set the tone, starting with ADP’s estimate for private-sector payrolls, which posted a weak 22,000 gain in January. The estimate from Revelio Labs is even weaker, highlighting a modest loss for payrolls last month.

The optimistic spin is that the slowdown in the labor market may not be the dire signal for the business cycle that it’s been in the past. Although there’s no clear verdict yet on what the hiring slowdown really means, one theory is that the labor supply has tightened so much that the breakeven pace of job growth — the monthly gain needed to keep unemployment steady — has dropped sharply. By some estimates, that threshold slid from roughly 100,000–150,000 new jobs a month in recent years to just 30,000–60,000 by late 2025.

Investors will be watching tomorrow’s delayed payrolls update from the government for fresh clarity. The consensus forecast sees hiring at companies picking up, rising 80,000 in January, a solid improvement over December’s stall-speed gain of just 37,000, according to Econoday.com.

Enter the Federal Reserve, which is tasked with deciding if the economy’s slowing to the point that more rate cuts are needed. For now, the outlook is sufficiently cloudy to persuade the market that the Fed will leave rates unchanged at the next two policy meetings in March and April. By June, policy easing will resume, according to Fed funds futures.

The policy-sensitive US 2-year Treasury yield is also watching and waiting, as it trades close to the median Effective Fed Funds rate.

The question is what will move the needle for Fed policy decisions? Weaker-than-expected data for payrolls tops the list, and so Friday’s report could be decisive. After months of a hiring slowdown, clearer signs that the labor market is still cooling could trigger more rate cuts sooner than expected.

Just to keep things interesting, Friday’s report will also reflect routine revisions to the government’s 2025 data. Analysts say the revisions will show the economy minted fewer jobs than previously reported. Not exactly the vibe that the bulls are looking for.

“If you’re not looking so much at GDP and the stock market right now and you’re focusing just on the labor market, it definitely seems like the momentum is skewed toward more risks of a downturn at the moment,” says Cory Stahle, an economist at the Indeed Hiring Lab.

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The fortunes of companies in the alternative energy sector crushed Big Oil shares last year. The leadership shift in favor of various slices of so-called clean energy shares surprised some market observers. The Trump administration, after all, hasn’t been shy about favoring the fossil fuels industry and changing the regulatory landscape toward that end. But in recent days Big Oil has found a second wind after lagging in 2025. Investors are now wondering: Was last year’s rebound in alt energy a one-off?

It’s still early in the year and so the rebound in Big Oil lately could be noise. Nonetheless, the surge in the likes of Exxon Mobil and Chevron this year are striking after a lackluster run in 2025.

An ETF proxy (XLE) for Big Oil is up 19.1% so far this year (through Feb. 6), or more than double the fund’s modest 7.9% increase for all of 2025. By comparison, the iShares Global Clean Energy ETF (ICLN) is up 13.2% year to date, which follows the fund’s sizzling 47.0% surge in 2025.

What’s changed to turn the tables on the clean energy recovery? In a word, Venezuela. After the US captured the country’s leader, Nicolás Maduro, last month and President Trump outlined plans to control Venezuela’s oil industry, the headlines have persuaded investors that a new era may be dawning for fossil fuel companies in the Western Hemisphere.

Although there are many risks ahead, Venezuela’s potential as an energy source is impressive, if only on paper so far. The country holds the world’s largest proven oil reserves, albeit in heavy crude deposits, which require costly processing compared with, say, Saudi Arabia’s light, sweet crude.

The bigger challenge: the long-running decay in Venezuela’s oil-industry infrastructure will take years to repair at a cost of many billions of dollars. ExxonMobil CEO Darren Woods told President Trump last month that Venezuela is “uninvestable.”

At the moment, Chevron is the last US oil firm still operating in Venezuela, but the Trump administration is working to smooth the path to incentivize more US oil companies to invest in the country. “The President’s team is working around the clock to ensure oil companies are able to make investments in Venezuela’s oil infrastructure. Stay tuned,” White House spokeswoman Taylor Rogers said in a statement last week.

How much of an opportunity Venezuela represents to Big Oil is still an open question. There are still many unanswered questions for a recovery that, even under the best of scenarios, will take years, given the deterioration that’s unfolded in the country oil infrastructure.

There’s also a tangle of unresolved legal issues. As Energy Intelligence Group, a consultancy, observes:

For international oil companies, service providers and financiers, a key question is whether Venezuela’s unresolved liabilities can be reconciled in a way that doesn’t dissuade potential new investment in a country that boasts the world’s largest oil reserves but requires massive outlays to revive its moribund energy infrastructure.

Considering the big picture, there’s still plenty room for debate about whether the Venezuela factor has materially altered Big Oil’s fortunes from an investment perspective. The 2025 leadership shift in favor of alternative energy companies has taken a hit so this year, but that could be noise. For a clearer view of the trend, it’s helpful to monitor how XLE, the Big Oil ETF proxy, fares against its clean-energy counterpart (ICLN).

 

As the chart above highlights, Big Oil’s strong run so far this year has yet to make a convincing dent in the trend bias that switched in 2025 in favoring clean energy shares.

Is the Venezuela factor a temporary bump that will fade as the messy details of rebuilding the country’s oil business become clearer? The alternate view is that Big Oil is on the cusp of a new era of opportunity. Maybe, but for the moment the trend chart above suggests the market has yet to reverse its clean-energy bet.

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By James Picerno

● The Doom Loop: Why the World Economic Order Is Spiraling into Disorder
Eswar Prasad
Review via The Economist
His book contends that changes to the balance of power between countries—the rise of China and India, the waning dominance of the West—have transformed the world economy into an engine for disorder. Once, this reconfiguration might have offered “opportunities for greater stability”, with countries choosing to “deploy their power in constructive ways for fear of losing influence”. But instead “the feedback loop between economics, domestic politics and geopolitics is spiralling out of control and becoming destructive on every front.”

● Skill Versus Luck: Taking the Guessing Out of Equity Fund Selection
Michael A. Ervolini
Summary via publisher (MIT Press)
Skill is the raison d’être for active equity management. Yet precious little is known about manager skill. What is skill? Who has it? How should it be measured? Is a manager’s skill improving, declining, or remaining consistent? Without answers to such fundamental questions, capital allocators have no choice but to rely on inferences, hunches, and guesswork. In Skill Versus Luck, Michael Ervolini explains how to move beyond skill fog with newer analytics developed over the past decade. Unlike conventional analytics that simply rehash fund outcomes, the newer cause-and-effect analytics relate a manager’s decisions to fund excess returns, providing rigorous measures of manager skill. Results from these newer analytics enable capital allocators to understand manager skill for the first time and make more effective allocation decisions.

● The Banker Who Made America: Thomas Willing and the Rise of the American Financial Aristocracy, 1731-1821
Richard Vague
Summary via publisher (Polity)
If you haven’t followed the money, chances are you don’t know the real story of America and its Revolution. Nothing gives a clearer insight into this history than the life of early America’s dominant merchant trader, first bank president, and first central banker, Thomas Willing. Richard Vague shows how Willing bankrolled – and in the process helped save – the Revolution and then fundamentally shaped the financial architecture of the young Republic. So powerful was Willing that President John Adams complained that George Washington and Alexander Hamilton were governed by him. Yet at a decisive moment in Willing’s life he voted against independence, as conflict between Pennsylvania’s moneyed elite and the emergent lower and middle classes embroiled the politics of 1776 in bitter class conflict. This dynamic would continue after independence, as Willing and his associates attempted to tame the democratic forces unleashed by revolution and thereby set up a tension that has never stopped shaping US politics.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

Bitcoin is back in the headlines after the world’s largest cryptocurrency tumbled sharply on Thursday, briefly slipping below $61,000. The drop marks a decline of more than 50% from its October peak, when it surged past $126,000 to a record high.

As of this writing, bitcoin has clawed back some of those losses and is trading near $66,000. But whatever its supporters or critics expect from the asset, one thing remains constant: extreme volatility is a feature that will likely endure.

That volatility underscores bitcoin’s biggest challenge relative to the use case laid out in the 2008 whitepaper by its still-unknown creator, Satoshi Nakamoto. The original vision imagined bitcoin as a peer‑to‑peer electronic cash system—an alternative monetary frontier enabling direct payments without banks, governments, or other intermediaries. Decentralized transactions, in theory, would free individuals from the traditional financial system.

But the monetary revolution didn’t unfold as planned. Over time, the idea of bitcoin as a medium of exchange has faded, largely because of the practical hurdles of using it for everyday purchases.

Instead, bitcoin’s appeal has shifted toward its supposed role as a store of value. Rather than buying groceries or making a down payment on a house or car, advocates now argue that holding bitcoin is prudent because it will preserve purchasing power over the long run. In this narrative, bitcoin becomes a hedge against inflation, geopolitical turmoil, and broader macroeconomic instability.

The comparison to digital gold rests on bitcoin’s limited supply: only a finite number can ever be mined. Scarcity is indeed a prerequisite for any store‑of‑value asset. But scarcity alone doesn’t guarantee that bitcoin will behave like gold in the long run. Much depends on how market sentiment evolves—and crypto crashes don’t help the case.

Whether bitcoin ultimately earns that store‑of‑value status is unknowable. Still, a growing number of investors, institutions, and even governments have added it to their balance sheets.

The problem is that it’s difficult to view bitcoin as a reliable store of value when its price can swing so violently in short periods. Gold has its own volatility, but it benefits from centuries of history as a monetary asset. Its long‑term record of preserving value relative to paper currencies is well‑documented. Projecting that legacy onto an asset not yet two decades old is still a leap.

As a speculative asset, however, bitcoin excels. The question is whether speculation alone can sustain it?

A popular 2023 book captured the quasi‑religious fervor that often surrounds bitcoin. “For Bitcoin believers, the rising price became its own justification,” observes Zeke Faux in Number Go Up: Inside Crypto’s Wild Ride and Staggering Fall. At a Miami conference, speakers leaned on circular logic: bitcoin will rise because it has risen. The mantra—“number go up”—became both rallying cry and worldview.

Bitcoin may one day become a respected store of value and/or a widely used medium of exchange. It may also end up as a historical footnote—a bold but failed experiment in digital finance. Even if you believe some version of the crypto future is inevitable, bitcoin faces no shortage of rivals vying for the same crown. The road ahead remains uncertain and treacherous for Nakamoto’s creation.

For now, the only certainty is that the volatility isn’t going anywhere.

Barring another glitch in the federal government’s on-again-off-again operating schedule, the delayed report for the fourth-quarter GDP report is set for release in two weeks (Feb. 20). When the update arrives, it’s on track to report a softer-but-still-resilient expansion for last year’s final quarter, based on the median for a set of nowcasts compiled by The Capital Spectator.

Today’s update indicates 2.7% annualized growth for Q4. That’s substantially below Q3’s torrid 4.4% pace. Despite the anticipated downshift, the Q4 nowcast, if correct, will reaffirm US economic resilience prevailed through the end of 2025.

Economic data from other sources unaffected by the government shutdown already highlight a strong probability that the economic expansion continued through December into January. The Dallas Fed’s Weekly Economic Index (WEI), for instance, reflects a steady, moderate year-over-year trend in GDP in recent history.     

PMI survey data for December and January also suggest that a growth bias endures. “Sustained service sector growth, supported by a robust rise in manufacturing output in January, indicates the economy is growing at an annualized rate of around 1.7%,” says Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

The recession worries of several months back in some circles once again look misplaced. That doesn’t mean that the economy doesn’t face challenges. But US resilience isn’t easily displaced, which is surprising, given the turmoil over the past year on trade, monetary policy, and elsewhere.

“Textbooks would say uncertainty is bad for economic growth, but there’s not much evidence that it’s had a significant impact on the US economy so far,” said Neil Shearing, group chief economist at Capital Economics. “Business investment is the first place you would expect it to show up, but that’s been strong.”

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Exactly why the US growth has held up better than expected will take time to unravel. Meantime, it’s fair to say that 2025 looks set to go into the history books as a year that defied the experts in terms of growth’s persistence.

“If you walked 100 economists in a room one year ago and informed them of these developments today, I suspect virtuallyall would project the US economy would be stagnant at best and cratering at worst,” said Ben Harris, director of economic studies at the Brookings Institution, during a conference last week at the think tank.

He continued: “Why haven’t simultaneous shocks, previously thought to be catastrophic, derailed the economy? I see four possible explanations. The shocks are not as large as some may think, offsetting stimuli compensate for the negative impact, prior understanding the economy is misguided, it will take time to realize the full impact of recent policy decisions. Ultimately, my conclusion is more pessimistic than I would hope for. If these policy shocks persist, their impact will likely be more damaging than what we have observed so far.”