Economic and market cycles are often defined using key letters, including U, V and K. In some ways, there is plenty of good news — but in other ways, not so much.

And which news applies to you likely rests on your personal financial situation. Here’s why:

Things are looking pretty good (the upward sloping part of the “K”) for folks with high incomes and lots of assets.

The stock market — especially those high-flying artificial intelligence tech stocks — is hot, real estate prices are rising, interest rates have been falling and tax rates are favorable.

In contrast, things aren’t so great (the downward sloping part of the “K”) for folks with lower incomes who are feeling the serious pinch of inflation on food, housing, insurance and almost everything except gasoline — and not typically participating in rising asset prices.

The bottom line is that not everyone is seeing the same economic picture.

And another letter is defining the economic and market outlook: the letter U. Schwab’s 2026 Outlook notes that “U” normally stands for uncertain, but today might better represent unstable.

Without the benefit of a magical crystal ball that could accurately predict the future, things are always uncertain.

The Schwab study notes several factors contributing to the unstable situation that include:

• Tariffs — their uneven application and whether they will be upheld by the U.S. Supreme Court
• Housing — with supply almost frozen by existing homeowners with low mortgage rates and the low supply of new homes
• Corporate profits — widely varied by company size with the largest businesses doing best
• Labor supply — altered by dramatic immigration shifts
• Fiscal stimulus and deficits having an impact on normal business cycles
• Oscillating inflation components
• Stock market narrowing and widening in sharper bursts

All of this translates into instability and the economy operating on different paths at the same time.

According to the Tax Foundation, tariffs have raised overall retail prices by 5%. Rising prices have hit not only imported goods, but domestic goods prices have also increased.

It’s worth noting that in many cases, full tariff costs have not been passed on to consumers with both foreign producers and domestic sellers eating some costs. But that likely won’t continue with tariffs ultimately being passed on to consumers.

Inflation has been tough to tame despite government claims of near victory. The new buzzword in government-speak is “affordability” and it’s a real deal.

According to the U.S. Bureau of Labor Statistics, an item costing $100 in January 2021 would cost $124 now, a 24% increase in just four years.

For the 12 months ending September 2025, inflation was 3.0%, which is still above the Federal Reserve’s 2% target but improving.

What folks need to remember is this 3% is on top of prior year price increases as shown in the nearby chart.

The affordability problem is most prominent for those in the lower half of incomes as wages have increased a bit less than prices over the past four years and many working families don’t have much disposable income.

Housing is a key factor as a bottom-tier home in California requires an income of about $136,000 to qualify for a mortgage, about 33% higher than the median household income.

Rents in Santa Barbara are among the highest in the country with an average cost of about $2,292 per month for a one-bedroom unit, about 40% higher than the national average.

That sure doesn’t leave much room for food, insurance, transportation, etc., which is why so many families are struggling.

By comparison, top-quartile single-family homes in Santa Barbara are trading in the low mid-$3 million range with true “luxury” properties often starting closer to $5 million and going well into eight figures. The “K” economy.

Everyone is trying to figure out how to deal with the affordability problem, with housing at the top of the list.

While calls for rent control are growing louder, history argues that it has never worked and, in fact, made things worse for the very people it’s supposed to help.

Economics argues for increased supply and there are efforts in this regard, but it seems clear that building should be thoughtful and consistent with community standards.

An eight-story project right behind our historic Santa Barbara Mission with big traffic concerns seems like a bad idea, and concentrating 1,100 units at La Cumbre Plaza seems oversized, too.

Hopefully, we can find ways to accommodate new housing without huge impacts on existing neighborhoods.

And let’s not forget about health insurance. According to the Los Angeles Times, “monthly premiums for subsidized health care plans offered by Covered California — this state’s Obamacare insurance exchange — are set to rise by 97% on average for 2026.”

The Times article went on to explain that the main reason for the spike is that about 1.7 million of the 1.9 million Californians will lose enhanced tax credits extended by President Joe Biden that expire on Dec. 31.

Even if Congress were to extend the subsidies again, premiums for plans offered by Covered California are still set to rise by about 10%.

Note that according to Mercer, folks covered by employer-sponsored health insurance plans are likely to see 6%-7% price increases, with much of this being passed on to the employees.

Regardless of where people get health insurance, costs are rising faster than inflation and clearly are an affordability issue.

There are no simple solutions to this incredibly complex problem, but two ideas have surfaced that might help. Both look to increased competition.

Covered California has contracts with just 12 different private health insurers while there are roughly 1,000-1,200 health insurance companies in the United States, according to the National Association of Insurance Commissioners.

The first idea is to encourage greater competition with hopes of driving down prices while improving quality and service. The second idea is to put health care spending decisions in the hands of consumers through health savings accounts that allow the insured to take a higher deductible health plan for big costs while shopping for first-dollar care.

Note that everything I’ve heard and read would argue that these strategies might help “bend the cost curve down” — but there are deeper underlying costs that will need to be addressed.

Bottom line: It would be nice to see more citizens in the upper part of the “K.” Meanwhile, a sizable portion of the population is going to have to be very careful and selective with spending, something retailers have already been seeing.