Amid the market volatility that has accompanied President Donald Trump’s second administration, institutional investors are wondering if such turmoil will tip into something worse. To better respond to investment risk, CIOs say investors can use forward-looking data and scenario planning to pinpoint when economic instability may devolve into a crisis.
As a long-term investor, “volatility is a feature and not a bug of the system,” says Peter Hand, CIO of Baker Street Advisors. Institutional investors need discipline, but “when we’re facing war and volatile markets and troubles in private credit, that discipline gets tested. … A lot of this is about psychology and what your plan is during volatility.”
Baker Street Advisors is a wealth manager with some endowment and family office clients. As such, Hand says, the firm’s core investment philosophy falls in line with the Yale endowment model, adjusted for taxes. Baker Street tracks various indicators, such as company earnings and the Federal Reserve’s five-year forward inflation expectations, to help monitor whether markets are headed toward a major downturn.
“Over the long term, we think the fundamentals rule,” Hand says.
Earnings Trends, Long-Term Inflation
“If we saw a big collapse in earnings, that probably wouldn’t change our [investment portfolio] allocations dramatically, but it would change our forecast,” Hand says. “We’re monitoring earnings in the long term, as many years out as we can,” he adds, noting that the firm looks beyond quarter-over-quarter trends.
The 10-year forecasted returns in the equities and bond markets are important, as are the spreads between these asset classes, he says, because the relationship between them ultimately affects endowment spending.
When return expectations come down, “the stress on spending may get higher,” Hand says. “If we’re seeing returns go down in the market, it usually creates budgetary pressures. If [that endowment] had leeway before, they may not have as much spending leeway now. If they had less leeway before, they may look at organizational changes” when under market pressure, such as reducing grant funding.
Regarding inflation concerns, Hand notes that Baker Street looks to the Fed’s five-year forward inflation expectation rate, rather than immediate changes to inflation caused by the war in Iran and ensuing spikes in oil prices.
“We’re kind of looking through that,” Hand says. “We think that the Fed would be able to control that enough to not impact our inflation forecast for long-term bond portfolios. We do look consistently across asset classes to see how they respond in these different inflation regimes. There’s no one way to hedge inflation, so we tend to use a combination of alternative assets that can do well in different inflation regimes.”
Hand says he sees forecasting as a game best played with higher probabilities, rather than trying to predict a “home run”—a high-reward bet with a high downside.
“Rather than try to bet 50/50 that I can forecast what’s going to happen, I’d rather have some protection from inflation no matter what,” he says.
Biggest Economic Threats for Asset Owners
Institutional investors predicted last fall that the three most significant “economic threats” in 2026 would be geopolitical shock (49%), a tech bubble (43%), and a recession or fiscal crisis (33%), according to an outlook survey published in November 2025 by Natixis Investment Managers.
The survey consisted of more than 500 institutional investors were surveyed across 29 countries in North America, Latin America, the U.K., continental Europe, Asia and the Middle East.
In addition to geopolitical concerns, a large percentage of institutional investors were expecting other macroeconomic factors to shape this year. Nearly 60% of investors (58%) forecasted an increase in unemployment, while many expected a rise in corporate defaults (46%), higher inflation (42%) and higher housing prices (41%), according to the survey.
Institutional investors entered “2026 facing a landscape defined by deep uncertainty and shifting priorities,” the Natixis report stated. “While technology and artificial intelligence have powered markets to new highs, the mood among global institutions is increasingly cautious. Geopolitical risk now overshadows even the threat of a tech bubble or recession, with slow growth, political dysfunction, unpredictable tariff policy, and China all weighing heavily in their outlook.”
Trip Wires, Scenario Planning
David Martin, the CEO and CIO of Arctium Capital Management, which specializes in outsourced CIO services and alternative investments, says that even when long-term investors have predictive data points at their disposal, they need scenario planning to help them take appropriate steps to mitigate risks.
“[Come] up with a couple of different scenarios and … different trip wires, where if they went off, we stop and assess things,” Martin says. “I look at it from a process standpoint: I don’t think it’s just one thing; it’s a lot of things” that need to be factored in. For a pension fund, Martin says, scenario planning might focus on liabilities and cash flows for benefit payouts.
“A pension fund has liabilities they have to pay out, so you want to understand exactly what your cash flows are,” Martin continues. “So you create the portfolio to help you in case you have to make major cash flow changes. You have to think about your liquidity and cash management.”
Scenario planning creates stability for investors, when markets and the economy suggest otherwise.
“If you pull in and out of the market [amid volatility], it’s not going to work,” Martin says. “You’re going to be in and out of it for the next 50 years.”
Tags: Earnings, Economy, market volatility, Outsourced CIO, Risk