By Thierry Hasse, Chief Investment Officer
Elevage Partners | January 2026
Markets rarely like surprises. Lately, however, Washington has been delivering them at a relentless pace.
Last week, equities sold off as investors absorbed fresh geopolitical messaging tied to Greenland, underscoring how quickly diplomacy can become market-moving headline risk. From rising tensions in the Middle East to shifting rhetoric on tariffs and territorial ambitions, investors are being forced to manage not only economic fundamentals, but also political uncertainty and policy surprises.
At the same time, the administration’s interventionist tone has extended into financial markets through renewed public pressure on interest rates, consumer credit pricing and corporate investment priorities.
But among all the moving parts, few issues matter more for long-term market stability than confidence in the Federal Reserve’s independence. When investors question whether monetary policy is being influenced by politics, markets typically demand a higher “risk premium” in interest rates. Fitch Ratings has warned that a meaningful erosion of Fed independence would be credit negative for the United States, weakening confidence in institutional stability and long-term policy credibility.
Threats to Fed Independence
On Sunday, Jan. 11, Federal Reserve Chair Jerome Powell revealed that the Department of Justice had served the Fed with grand jury subpoenas tied to scrutiny of the Federal Reserve’s headquarters renovation. Investors quickly interpreted the extraordinary development as escalating political pressure on monetary policy.
The legal scrutiny reportedly centers on Powell’s June 2025 congressional testimony regarding cost overruns tied to the Fed’s multi-year renovation of its Washington headquarters. Powell pushed back forcefully, suggesting the investigation was being used as leverage to influence Fed decision-making, particularly through pressure for sharply lower interest rates.
Markets didn’t wait for a legal outcome to react. Bond investors demanded higher yields, reflecting concern that monetary policy could become less anchored to economic data and more sensitive to political objectives. By the end of last week, the benchmark 10-year Treasury yield had climbed to roughly 4.23%.
Stocks Slip Despite Strong Bank Earnings
Equities slipped on the week, even as major banks delivered solid earnings. Yet bank shares were weaker, suggesting sentiment and valuation mattered as much as results.
Meanwhile, small caps have outperformed large caps early in 2026. Is this finally the year smaller companies lead? We’ve heard this narrative before, and we remain skeptical — particularly if interest rates stay higher for longer.
Inflation Makes Progress, But the Last Mile Is Hard
While Fed headlines drove market psychology, inflation remains the fundamental constraint on how quickly policy can ease. December core consumer prices rose at a 2.6% annual rate, a bit less than expected, reinforcing hopes that inflation continues to recede toward the Fed’s 2% goal.
However, progress tends to slow, not accelerate, as inflation approaches the target. Most market participants expect the Fed to hold rates steady at the Jan. 26–27 Federal Open Markets Committee meeting, with expectations for the next reduction pushed out toward mid-year.
Davos Adds Another Layer of Uncertainty
This week, the World Economic Forum in Davos, Switzerland, is underway, bringing together political leaders, central bankers, and global CEOs at a time when markets are searching for direction and confidence.
In years like this, Davos can function less as a “vision conference” and more as a real-time risk barometer.
With geopolitical tensions elevated, economic growth uneven, and policy messaging shifting rapidly, markets will be listening closely not just to official remarks, but to the tone and broader posture of cooperation — or confrontation.
Volatile Week Ahead?
U.S. markets were closed Monday in observance of Martin Luther King Jr. Day, and the remainder of the week is expected to remain action-packed.
Investors will be watching renewed tariff threats tied to Greenland-related negotiations. President Trump said tariffs on certain NATO members’ goods would remain in place “until such time as a deal is reached” connected to Greenland. Even if the policy path remains uncertain, tariff rhetoric can quickly reintroduce volatility, particularly for multinational companies and sectors sensitive to trade flows and input costs.
On Jan. 22, market participants will receive the latest reading on Personal Consumption Expenditures (PCE). As the Fed’s preferred inflation gauge, it will be closely watched for confirmation that disinflation is continuing without reaccelerating pressures that could keep rates higher for longer.
In earnings news, we will be watching results from Netflix (Tuesday), Johnson & Johnson (Wednesday) and Procter & Gamble (Thursday), providing timely insight into consumer demand and corporate confidence.
Closing Thought
Markets can adjust to almost any economic outcome. What they struggle with is uncertainty around the rules of the game.
With geopolitics elevated, inflation still in focus and policy messaging shifting quickly, we expect markets to remain sensitive to surprises, and volatility may persist.