Not All Quiet on the Western Front

Political Developments and Market Affordability Measures

President Trump has seen his poll numbers drop due to consumer economic stress and affordability issues, while some people think he is distracted by foreign policy. But over the past week, President Trump ordered Fannie Mae and Freddie Mac to buy $200B in mortgage-backed securities, expecting this move to tighten spreads and drive down mortgage rates. This was followed by the announcement of a one-year, 10% cap on credit card rates, and a subsequent plan to limit corporate buying of homes.

Why is the Trump Administration focusing on Main St.? The President wants to prevent Democrats from gaining a House majority in the upcoming elections; therefore, affordability will remain a primary focus of the administration until further notice. Next week, President Trump will attend the World Economic Forum in Davos, where it is rumored that he will introduce a more comprehensive U.S. housing plan to continue these affordability efforts. However, it is important to keep in mind that the Housing crisis is a supply problem that remains limited in the short term; regulations must be adjusted to fundamentally change this scenario.

Foreign Policy Tensions and Geopolitical Risks

Geopolitically, the U.S. extracted Nicolas Maduro following a criminal indictment for drug trafficking and leading a corrupt regime. This action is part of the implementation of the “Donroe Doctrine”, which focuses on countering rival powers and shifting from diplomacy to direct intervention, when needed, to maintain hemispheric dominance. Meanwhile, in the Mideast, Iran saw an escalation of public uprisings against the regime. This resulted in a brutal response in which the Islamic Revolutionary Guard Corps and Basij militia killed over 16,000 people. As the regime shifts into overdrive to suppress dissent and maintain control, a critical question arises: if these regimes fall, who will fill the leadership vacuum? The U.S. appears to have learned a lesson from Iraq, seemingly preferring to keep governing bodies intact while removing only the top of the leadership. Lastly, the Trump administration is threatening to impose a 10% tariff on several European countries on February 1^st, to increase to 25% in June, if those countries fail to support a U.S. takeover of Greenland. While President Trump has routinely backed off from such threats, this could stall negotiations towards the trade agreement with Europe.

Economic Signals, Market Response, and Earnings Trends

Domestically, the U.S. Justice Department opened a criminal investigation against Fed Chairman Jerome Powell. Markets reacted poorly to this news, as Fed independence is essential to maintain credibility. If the Fed is perceived as lacking independence, interest rates may rise because investors will fear the central bank will no longer be diligent in limiting inflation. Preserving the Fed’s institutional independence is vital for the stability of the dollar, rates and the broader economy.

If the above wasn’t enough, earnings season for Q4 2025 began with banks leading the updates. Banks provide an important window into the health of the economy; investors gain insights into the strength of businesses based on credit data and lending appetite. The good news is that results far exceeded expectations – credit conditions show limited stress and write-offs point toward a positive economic environment. Because market information is discounted quickly, credit spreads can be used as a sign of the improving or weakening of businesses, based on defaults and lending activity. At least so far, Trump’s efforts to push or goad the Fed into lowering interest rates seem to have accomplished little, and markets do not show much concern.

There is much to distract attention overseas from Venezuela to Ukraine to Iran to Greenland.  There is certainly a lot happening, perhaps more than usual.  But the economy is performing well, so those significant, open foreign policy issues have little direct bearing on the economy or the markets. As long as growth is solid, productivity gains hold down inflation, corporate profits remain on their positive trajectory, and interest rates oscillate around current levels, there’s not much to prevent a positive performance from the equity market.

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