By Brian McAuley

1st Quarter, 2026

Perhaps the most surprising trade policy development of 2025 wasn’t President Donald Trump’s tariffs but rather foreign governments’ refusal to respond in-kind. Although such abstinence is economically optimal, politicians typically embrace tit-for-tat retaliation for political and strategic reasons.

It didn’t mean, however, that governments, companies, and even many individuals were standing still. Instead, they “retaliated” in a smarter way: reducing their future reliance on a US that has increasingly embraced protectionism since at least 2016…

~ Bloomberg, February 12, 2026

President Trump chose a Federal Reserve chair, Kevin Warsh, he thinks he can count on to lower interest rates. History suggests three different ways presidents have come to regret that bet.

The chair could deliver the lower rates the president wants and unleash inflation, which is what happened to Richard Nixon with Arthur Burns. He could be loyal but unable to bring his colleagues along, as Jimmy Carter discovered with G. William Miller. Or he could turn independent and raise rates against the president’s wishes, as Harry Truman learned with William McChesney Martin Jr.

~ The Wall Street Journal, February 6, 2026

In our past three discussions, a primary focus has been on the impact of the reintroduction of tariffs. As it had been nearly ninety years since the last time the U.S. government imposed significant tariffs on foreign imports, it came as a shock to find tariff rates suddenly thrust up to levels last seen during the 19th century. If tariff rates had remained as initially announced last April, goods brought into the U.S. would have faced an average import tax close to 30%.

As it happened, tariff rates did not remain as high as initially proposed. By the end of 2025, the average tariff rate had fallen from 30% down to 15.6%. This reduction lessened the economic shock that would probably have unfolded had the original tariff rates remained. In the financial markets, however, there was less reversion to the previous norm. Instead, the shift in sentiment surrounding the dollar in the wake of the original tariff announcement largely remained.

The enduring shift in sentiment surrounding the dollar has been the defining factor underpinning the relative performance of markets over the past year. While the U.S. equity market bounced back from its turmoil following the announcement of tariffs in April of last year to end the year up 18%, equity markets around the world went on to post their best performance in nearly two decades. European equity markets rose 25% and Emerging Markets rose 32% in their local currencies. In U.S. dollar terms, gains in equity markets outside the U.S. last year were amplified further. A diversified equity investment in the Eurozone, for example, rose 41% in 2025 on a currency-adjusted basis.

Yet while the shift in dollar sentiment proved decisive for many markets in 2025, it is important to recognize that the events of the past year have unfolded in the context of longer-term trends. While the decline in the dollar against other major currencies last year was significant, there have been growing signs of a weakening appetite for U.S. dollars for some time.

One of the earliest signs appeared nearly a decade ago, in the wake of the first moves toward protectionism in the U.S. In that year, the U.S. withdrew from the Trans-Pacific Partnership. It turned out to be the first move in what became a larger pivot toward protectionism, and it coincided with the beginning of the recent erosion of the U.S. dollar’s use as a reserve currency. This erosion, indicated by the shrinking share of the green bars in the graphic below, continued through 2024.

Given the events of the past year, the data for 2025 will likely show a continuation of the erosion of the dollar’s use as a reserve currency, if not an acceleration. The pivot toward protectionism in 2017 has been one of the driving forces in the trend shown above, but it has not been the only driving force. The largest annual change in the dollar’s status over the past decade occurred in 2019, when the dollar fell from 60.75% of global reserves to 58.92% in 2020. This leap coincided with the first overt attempts by the president to influence the Federal Reserve, when he called on the Fed to lower interest rates to zero amid flurries of derogatory comments directed at Fed Chair Jerome Powell.

As with the pivot toward protectionism with the withdrawal from the Trans-Pacific Partnership trade agreement, the president’s criticisms of the Federal Reserve in 2019 marked a pivot toward a more determined effort to influence monetary policy. These early efforts to erode the independence of the Federal Reserve blossomed into full bloom in 2025, as not only were policy decisions panned and the Federal Reserve Chair criticized, but legal action was brought against individual members of the Federal Reserve Board, including Chair Powell himself. This was an unprecedented escalation.

In January, after being threatened with a criminal indictment, Powell, a lawyer by training, took the extraordinary step to release a video statement, in which he said the accusations against him “should be seen in the broader context of the administration’s threats and ongoing pressure.” He continued:

“The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president. This is about whether the Fed will be able to continue to set interest rates based on evidence and economy conditions – or whether instead monetary policy will be directed by political pressure or intimidation.”

These events, played out in full view of the public over the past few months, were the most dramatic confrontation between a president and the Federal Reserve since the early 1970s. At that time, the Federal Reserve had begun lifting interest rates in response to rising inflation in the late 1960s, and presidents Lyndon Johnson and Richard Nixon increased their attacks on the Federal Reserve’s independence in private just as forcefully as we have seen play out in public over the past year.

We have reviewed a number of those moments of conflict from the 1960s and 1970s in our discussions over the years, and the goal of those reviews was to be prepared to respond to a similar market environment in an informed manner. Not only has there been a pivot toward protectionism and erosion of central bank independence over the past decade, but there has also been a pivot toward higher inflation, along with rising interest rates and bond yields. These growing pressures, a progression of seemingly independently coinciding trends, also happened to be part of the early stages of past inflationary periods.

The chart above shows the long descent of bond yields in the U.S., Germany, and Japan from the early 1980s to the early part of the current decade, along with the recent rise over the past few years. The fall to 0% in 2020 and 2021, and the subsequent launch higher in 2022 through 2025, will probably be viewed as one of the more consequential pivots in market history.

The chart also provides a visual representation of the pivot into the market environment we are navigating today, which is quite different than what existed prior to 2020.

Prior to 2020, disinflation and declining bond yields were the norm for four decades, and these trends were joined by a strong U.S. dollar and relatively strong U.S. equity market in the 2010s. Over the past five years, however, we have seen each of those prior trends come to an end. In their place, an environment of rising inflation and bond yields has emerged, along with a weaker dollar and relatively strong performance by global equity markets. Not to be forgotten, the value of money has a long history of rising during periods of inflation and erosion of monetary independence, and the gains in precious metals over the past five years reflect that rising value.

In 2025, there were very few markets which detracted from the performance of a globally diversified portfolio. Such a golden market environment is relatively uncommon, and it is unlikely it will be repeated any time soon.

Yet if market history is any guide, the pivot that unfolded during the first half of this decade ushered in a market environment that will last for some time to come. Leadership changes in equity market and currency performance, like we have seen recently, usually lead to a market regime that endures 8–10 years. Pivots in bond yields and inflation, as we have also seen in recent years, have, in the past, led to a new market regime that endures for a decade, or longer.

We anticipated these shifts in the market landscape, and while there will certainly be volatility along the way, our approach is well suited to this new market environment.

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