Select Dividend '10 Surprises for 2026': #7 Higher Structural Market Volatility

Upstream inflation pressures are re-emerging.

Recent data point to renewed inflation pressure coming from upstream sources. Global supply chain stress has turned higher, a factor that previously contributed to supply-driven inflation. At the same time, several key commodity indexes, including the CRB Raw Industrials Index, have accelerated to multi-year highs, suggesting rising input costs across a broad range of goods.

This matters because inflation typically responds to input cost pressures with a delay. When year-over-year raw industrial prices are pushed forward by some monthly interval (seven months was the most significant for the Raw Industrials Index), the relationship with inflation becomes more evident. The combination of rising commodity prices and supply-side pressure increases the likelihood that inflation remains a relevant macro risk into 2026.

Sources: Federal Reserve Bank of San Francisco and New York, Simon White (Bloomberg). Global Supply Chain Pressure as of 12/31/25. Supply-Driven Inflation as of 11/30/25.

Sources: Bureau of Labor Statistics, Commodity Research Bureau, Bloomberg, Data as of 12/31/25.

Policy uncertainty amplifies market volatility.

Inflation risk is occurring alongside elevated economic and policy uncertainty, as proxied by the Baker, Bloom and Davis Economic Policy Uncertainty Index. Periods of heightened uncertainty tend to coincide with more frequent and larger spikes in the VIX index, as investors respond to shifting information and policy signals. Taken together, persistent uncertainty and renewed inflation pressure point to a higher baseline level of market volatility in 2026.

Sources: CBOE, Baker, Bloom and Davis, Bloomberg, Joe Little (HSBC). Data as of 12/31/25.

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The '10 Surprises for 2026' are not intended as statements of fact. They are predictions that may or may not occur based on a variety of circumstances.

The Baker, Bloom and Davis composite index of economic policy uncertainty draws on the frequency of newspaper references to policy uncertainty and to other indicators of policy uncertainty including expiration of tax provisions and disagreement among economic forecasts of inflation and government expenditure. 

Supply-drive inflation is composed of the contributions to personal consumption expenditures (PCE) inflation from supply-driven versus demand-driven components.

Global Supply Chain Pressure Index is normalized such that a zero indicates that the index is at its average value with positive values representing how many standard deviations the index is above this average value (and negative values representing the opposite).

The CRB Raw Industrials index is a subset of commodity prices tracking a dozen+ sensitive, early-stage raw materials that are not traded on futures exchanges.

Past performance does not guarantee future results. Investing in securities involves risk, including the possibility of the loss of principal.

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