Morning Note

We addressed stagflation (weak economy/rising inflation) risk in a video or two last year as conditions developed -- which was nevertheless not our base case heading into 2026... Although we had been flagging the inflation/interest rate risk that we felt could accelerate in the back half of the year... All the while our view of economic conditions remained constructive, largely due to fiscal oomph coming from record tax refunds and the OBBBA (One Big Beautiful Bill Act).

Now, however, per the PWAI narrative below, stagflation is suddenly a front-and-center, albeit potentially transitory, concern:

Market & Macro Conditions Overview -- April 2026

Markets are navigating a genuinely complex macro environment — one that evolved differently than our base case entering 2026.

We had been constructive on U.S. economic conditions, supported by meaningful fiscal tailwinds including record tax refunds and the stimulus embedded in the One Big Beautiful Bill Act. We had flagged inflation and interest rate risk as a potential back-half accelerant, but our growth outlook was positive.

What changed that calculus was the U.S.-Israeli military operation against Iran, which throttled Strait of Hormuz shipping, delivered a sharp energy-driven inflation shock, and simultaneously hit consumer confidence — now at record lows.

That combination has introduced stagflationary pressures that were not our base case, but which we believe are largely conflict-driven and therefore potentially transitory — a view that gained tentative support this week as Vice President Vance traveled to Islamabad for scheduled direct U.S.-Iran talks this weekend — early signs of diplomatic engagement, though the outcome remains uncertain and we're watching closely.

The Federal Reserve finds itself in a difficult position, though it's worth noting that fed funds futures are still pricing a rate cut by year-end — reflecting market conviction that if labor conditions deteriorate, the Fed will prioritize unemployment over inflation in its policy response, which we think is the correct read of the current political and institutional environment.

Equity markets have shown resilience this week as direct U.S.-Iran diplomatic talks advance, suggesting the market is beginning to price a potential off-ramp. We remain positioned for the uncertainty: real assets, gold, international equities, and elevated cash reserves that preserve our flexibility to act as conditions clarify.