Houston, We Have A Problem
We are coming off of three years in a row of strong stock market returns and a solid start for equity markets worldwide in early January. As of last week, the average volatility across US bonds, equities and the dollar over the past month had sunk to the lowest since at least 1990. However, that run of tranquility seems finished for now after threats of a new tariff war have arisen. Markets fell 1-2% yesterday worldwide as tariff threats on Europe over Greenland’s sale were announced. On Saturday, President Trump announced eight European nations, including Denmark, France, Germany, and the UK, would face a new 10% tariff starting February 1st, escalating to 25% on June 1st. Following the threat, Europe is considering its own set of counter-tariffs as world leaders meet in Davos, Switzerland, along with a possible pause in approval of the recent European trade deal.
EU leaders plan to hold an emergency summit on Thursday to try to reduce the tariff war temperature. There is potential for Europe to leverage the $8 trillion of US bonds and equities it owns, arguing weaponization of capital could be far more disruptive to markets than trade flows. One Danish pension fund is already suggesting it will sell $100 million in U.S. Treasuries. The widespread view is that the US and Europe will reach a diplomatic solution on Greenland. In the meantime, the 10-year Treasury yield is bumping up against 4.3%, the highest in four months, as longer-dated Treasuries have fallen and bonds in Japan have been routed. Investors may want the U.S. to focus more on insuring domestic tranquility rather than international geopolitics.
Chinese Population Declining
Since population is one factor driving worldwide economic growth, it is worth considering that China’s population shrank for a fourth consecutive year last year as its birthrate fell to a record low. China’s total population fell by about 3 million to 1.405 billion at the end of 2025. New births in the country fell to 7.92 million, down from 9.54 million in 2024. The number of births per 1,000 people fell to 5.63, from 6.77 in 2024. That is the lowest number of births and lowest birthrate reported since records began in 1949 when the People’s Republic of China was founded.
The steep drop in births in 2025 can be attributed in part to an increase in births the year prior. Most of 2024 fell in the Year of the Dragon, which is seen as an auspicious one for marriage and births in Chinese culture. I guess a Dragon is better than a Horse, which is the 2026 Chinese lunar new year symbol. Aside from 2024, births have been dropping steadily since 2017. In 2022, deaths overtook births. Decades of China’s one-child policy, which ended in 2015, have contributed to a rapidly aging population with fertility rates well below replacement level, which threatens to hinder future economic growth. Chinese leaders have been rolling out new initiatives designed to encourage births, such as child-care subsidies, but these policies may not be sufficient to halt population decline at this point. In other countries with aging populations, immigration often helps offset low birthrates and keep the population younger, but China has virtually no immigration. Europe and the U.S. are also facing aging populations that will impact longer-term growth rates.
The Dark Side of the Moon
Earnings reports from major banks such as J.P. Morgan# and Bank of America# last week showed a healthy consumer, lower credit delinquencies and a solid economic backdrop. However, after a strong showing last year, several financial stocks sold off on those respectable earnings reports. There was probably also some overhang from a proposal to cap credit card rates at 10%, which would crimp profits. The other big thematic takeaway last week came from Taiwan Semiconductor#, which projected significant increases in capital spending for semiconductor chipmaking equipment. That news elevated the technology sector last week but reversed this week.
Earlier in the year we noted several potential headwinds and risks for 2026, including high market valuations, midterm elections ahead which often bring increased volatility and policy uncertainty, and lingering tariff impacts. The second year of a presidential cycle, which we are in, also tends to be the weakest historically. We continue to focus on long-term trends that favor continued economic growth, but with some bumps and potholes along the way. Fiscal stimulus and technology spending are expected to support economic growth in 2026, including potentially $200-300 billion from the One Big Beautiful Bill Act (OBBBA). This fiscal thrust should provide a front loaded boost to economic activity and corporate earnings. Overall corporate earnings growth for last quarter is pegged at about 8% while 2026 is set for 15% earnings growth. The path of least resistance for this economic expansion and bull market so far had been higher with less volatility, though we would not be surprised to see a normal drawdown this year. Markets are indicated to open only slightly lower this morning, so maybe we will avoid the dark side of the moon.
Singer Billy Ocean turns 76 today, and actress Geena Davis is in a league of her own at 70. Astronaut Buzz Aldrin, the second person to walk on the moon, also celebrated his 96th birthday yesterday!
Christopher Crooks, CFA®, CFP® 610-260-2219