Is This Another "One Three" Cycle Year?

1.) CYCLE - Since 2018, there has been a pattern that could be repeating itself. Markets have been marked by a cycle that starts with a reset year, followed by three good years. Then another reset year, followed by three good years. And now again, perhaps a reset year. The unknowns around the effects of AI, the credit bubble, and the massive capital expenditures from the MAG7 (Apple, Microsoft, Meta, Netflix, Tesla, Amazon, Google) can really be an overhang. These kinds of investment cycles often weigh on index returns in the near term. Looking ahead, once those investments start to show results, or at least give people some visibility, the market should be able to move higher again. And that is regardless of what happens with Iran. There are other issues right now, both in the US and globally, not the least of which is a shift in both growth and inflation. The PMI data are indicative of GDP rising at an annualized rate of just 1.0%. At the same time, price gauges point to consumer price inflation (CPI) accelerating back to around 4%. That is shifting Fed data very fast. If this does turn out to be a reset phase, it will likely just bring valuations back to more logical levels. Importantly, if this plays out again, all of our models back-tested positive in both 2018 and 2022. So far in 2026, our more moderate model (Tiger) is up while our aggressive model (Great White) is down, which is a fairly similar monthly return pattern of those reset years.

2.) FED - I've said many times that if you can get the rate of change of growth and inflation right, you usually get the Fed's moves right. Given the recent disruptions in the oil market and bond volatility (MOVE Index at 103!), the market just experienced one of the most extreme Fed expectation shifts of the past 20 years. Two Fed rate cuts have been priced out in just the last month. It would likely have a near-term negative effect on markets if the Fed does in fact raise rates over the next several weeks/months. That's not yet the base case, but if that were to occur, it would line up with the One Three cycle discussed above. So far, the US 2 YR Treasury yield is still signaling a bullish/upward bias, pointing to at least a continuation of Fed pausing.

3.) VOLATILITY - Right now the S&P 500 is pricing a +/-1.75% daily move every session from now until June expiration. By historical comparison, that is a lot of volatility over a long stretch of market time. The VIX futures curve is still in "backwardation" where the current spot price of VIX is higher than the front month future and the front month future is higher than the 2nd month. That condition is currently 14 days long, which is fairly similar to what we experienced in the spring of 2025. What does all that mean? We just have to expect a higher degree of near-term volatility.