Kathy Jones, Chief Fixed Income Strategist for Schwab Center for Financial Research, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss her economic forecast for 2026.
Jones notes that the economy continues to move at a reasonably healthy pace. Areas of potential weakness include manufacturing and agriculture, which are more affected by tariffs. Small and medium-sized businesses tend to feel a larger impact from tariffs than larger companies. Larger companies are focused on large capital expenditures, especially those related to artificial intelligence or data centers. Overall, the economy is likely to slow, but not enter a recession, with the bottom half dragging down the faster-growing companies.
Inflation has not been at the Fed’s 2% target for over four years, and is now closer to 3%. Jones states that it will be difficult to get inflation back to 2%, as the rate has recently started to rise. The Fed has little room to maneuver and is likely to cut just once or twice if economic growth slows in 2026.
Treasury, agency, and investment-grade corporate bonds are attractive, with yields near 4% compounding solidly over time. Valuations are not attractive in the leveraged loan and below-investment-grade sectors, as investors aren’t being paid much to take on extra risk in a time of tight credit spreads. Municipal bonds are attractive to those in high tax brackets who live in high tax states.
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