Executive Summary
The U.S. economy enters February 2026 in a CAUTIOUS regime — neither full risk-on nor risk-off. The signal mix is conflicted: strong labor markets and equity performance sit alongside a recently un-inverted yield curve and a Sahm Rule reading just 0.07 percentage points from triggering.
This is the kind of environment that rewards patience over aggression. The last time we saw a similar configuration (late 2019), the correct trade was to maintain positions but tighten risk management. The difference now: quantitative tightening has injected additional uncertainty into the liquidity picture.
Signal Dashboard
Regime Analysis
Why CAUTIOUS (not RISK_ON)?
Three signals prevent us from upgrading to RISK_ON:
At 0.43pp, the Sahm Rule indicator is uncomfortably close to 0.50pp — the level that has preceded every recession since 1970. The 3-month moving average of unemployment is rising faster than the 12-month low. This isn't a false alarm signal — it's the single most reliable recession indicator in modern economics.
The 10Y-2Y spread turned positive after being inverted since mid-2022. Historically, recessions begin after the curve un-inverts, not while it's inverted. The inversion is the warning; the un-inversion is the clock starting. Average lead time: 6-18 months.
M2 YoY growth has turned positive after the historic 2022-2023 contraction. This is a tailwind for risk assets, but growth is modest (+3.8%) compared to the 2020-2021 surge (+25%). The Fed's balance sheet is still contracting (quantitative tightening), creating a headwind.
What Would Change the Regime?
| Trigger | Direction | Likelihood |
|---|---|---|
| Sahm Rule triggers (≥0.50pp) | → RISK_OFF | Medium (30%) |
| Fed cuts 50bp+ | → RISK_ON | Low (15%) |
| VIX sustains >25 | → RISK_OFF | Low (10%) |
| M2 YoY >5% sustained | → RISK_ON | Medium (25%) |
| Credit spreads blow out | → CRISIS | Very Low (5%) |
Signal Module Breakdown
1. Macro Regime (Hamilton Model)
Our Hamilton Markov Switching model assigns 60% probability to the CAUTIOUS state, 25% to RISK_ON, and 15% to RISK_OFF. The model has been in the CAUTIOUS state since November 2025, when the Sahm Rule breached 0.35pp.
2. Yield Curve Signals
The 10Y-2Y spread un-inverted in October 2025 after 27 months of inversion — the longest in modern history. Historical precedent: every post-inversion period since 1965 has been followed by a recession within 6-18 months. We are currently in month 3.
3. Labor Market
NFP growth has decelerated from 250K/month (early 2025) to approximately 150K/month. This isn't contractionary — breakeven for population growth is roughly 100K — but the trend is clearly downward. Initial claims remain stable, which argues against imminent recession.
4. Liquidity & Credit
M2 recovery is the most bullish signal in our stack. The 2022-2023 M2 contraction was unprecedented in the post-war era. The return to positive growth removes a major structural headwind for risk assets. Credit spreads remain tight, suggesting no near-term stress.
5. Volatility
VIX at 16.4 is below the long-term average (~20). Low realized vol tends to persist but can reverse sharply. Current VIX term structure is in contango (normal), suggesting no imminent dislocation expected by options markets.
6. Bitcoin & Crypto Overlay
BTC is trading near all-time highs with strong institutional inflows via ETFs. The macro regime supports continued crypto strength as long as liquidity conditions don't deteriorate. On-chain metrics (MVRV, SOPR) suggest we're in mid-cycle, not euphoric territory.
📌 January Thesis: "Cautious Optimism"
Core view: Maintain risk exposure but with tighter-than-normal stops. The macro backdrop is deteriorating at the margin (Sahm, yield curve) but hasn't broken. Liquidity recovery and low VIX provide a floor.
Key positions (educational):
• Equities: Stay invested but reduce leverage. Favor quality over growth. Small caps at risk if recession materializes.
• Fixed Income: Duration is becoming attractive. If recession arrives, long bonds will rally significantly.
• Crypto: BTC mid-cycle position. ETF inflows provide structural demand. Reduce altcoin exposure if Sahm triggers.
• Cash: Higher-than-normal allocation (15-20%). Dry powder for dislocations.
What to watch next month: February jobs report (Sahm Rule update), Fed meeting minutes, credit spread behavior around earnings season.
Data Sources
This report is generated from:
• FRED: 103,419 observations across 38 economic series (2000-2026)
• Hamilton Markov Model: Custom implementation based on Hamilton (1989)
• CoinGecko API: Real-time crypto market data
• Mempool.space: Bitcoin on-chain metrics
• Atlas Signal Engine: 6 proprietary signal modules
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