Geopolitics and Your Portfolio: Navigating the start of 2026

I was speaking with a client the other day who mentioned that simply checking the news alerts on their phone has become an exercise in managing anxiety. Between the headlines of conflict in the Middle East and the shifting landscape at the Federal Reserve, it feels like the world is constantly demanding a "reaction." They felt like they should "do something". 

When the S&P 500 crosses milestones like 7,000 only to pull back 2.5% amid breaking news, it’s natural to feel a bit of nerves. However, as we look at the data for 2026, it's important to separate the noise from the long-term economic reality.

The Situation: Contextualizing the Conflict

We are currently on Day 4 of coordinated military strikes by the U.S. and Israel against Iranian targets. While the humanitarian cost is heavy and the headlines are jarring, the immediate economic impact on the U.S. has been relatively contained.

Oil prices have certainly seen a jolt—with WTI Crude rising nearly 7% to around $76 and Brent hitting 13-month highs near $85. While this may lead to a temporary gyration in inflation over the next few months, it’s unlikely to cause a massive structural dislocation in the U.S. economy. The worst-case scenario—a total closure of the Strait of Hormuz—has been largely discounted by markets as initial reports suggest the Iranian navy’s capacity to block the chokepoint has been significantly limited.

The 2026 Backdrop: A New Monetary Regime

Beyond the headlines, the more significant shift for your portfolio is the "Warsh Shock." With Kevin Warsh nominated to lead the Federal Reserve, we are entering a "Sound Money" era. The Fed is expected to cut short-term rates to fuel productivity while simultaneously shrinking its massive balance sheet.

This creates a unique environment:

• The Yield Curve: We’re seeing a "bear steepener," where long-term yields rise while short-term borrowing costs fall, which generally benefits sectors like regional banks.

• The Rotation: With the S&P 500's Shiller CAPE ratio hovering near 40—a level of overvaluation rarely seen in history—capital is starting to rotate away from mega-cap tech and into domestic small-caps and cyclicals.

Staying Grounded in 2026 

Geopolitical events are unsettling, but for most investors, the key is to avoid making emotional decisions based on the 24-hour news cycle. The 2026 outlook remains fundamentally driven by active selection and a focus on companies with durable free cash flow that can weather a "stagflation-lite" environment.

We expect overall stability for the 2026 horizon, provided we remain focused on long-term investment horizons rather than short-term headlines.

Let's connect if you feel the need to discuss this further!

Disclosures:

S&P 500: A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Investors cannot invest directly in indexes.

The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice.