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Investors largely ignored sweeping geopolitical developments in January, instead concentrating on domestic stock selection amid historically elevated equity valuations.
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Technology and Financials declined while Energy, Materials, and Industrials surged, leaving the tech-heavy S&P 500 advancing modestly despite setting new all-time highs.
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The Fed signaled patience amid mixed signals, with weak job growth clashing against solid GDP, manufacturing strength, and inflation running above target.
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President Trump nominated Kevin Warsh as the next Fed Chair. We do not expect significant policy changes before this transition in May.
In January, investors seemed indifferent to a flood of potentially transforming national and international news that reached from Venezuela, all the way to Greenland. Instead, the business at hand seemed to be sifting through domestic stocks for the best prospects given historically high valuations. The result produced a dramatic shift from trailing years, with Technology and Financial stocks showing negative returns while the Energy, Material, and Industrial sectors rose 14.4%, 8.7%, and 6.7%, respectively. Given the heavyweight of Technology in the S&P 500, the Index was well behind the leading sectors, gaining 1.4% for the month. Nevertheless, the Index hit an all-time high late in the month. Small and value stocks were also relatively strong, as were the international benchmarks, behind a 2% drop in the U.S. Dollar.
The Federal Reserve Federal Open Market Committee meeting on January 27-28 was another occasion to reexamine the competing forces of full employment and inflation. Chairman Powell summarized the balance between the two as a Fed “well placed to wait and see.” But there were mixed opinions on the committee. Federal Reserve Governor Christopher Waller has been the committee’s strongest voice for further rate cuts, pointing to jobs. In a statement made after the meeting, he cited stagnant job growth in 2025. “Zero job growth versus an average of almost two million for the ten years prior to 2025. This does not remotely look like a healthy labor market.” On the other side, the International Monetary Fund projects U.S. GDP growth to accelerate from 2.1% to 2.4% in 2026. The latest measure of U.S. manufacturing concurs, with the ISM at 52.6%, well above the threshold for growth and the highest reading since August 2022. New inflation numbers arrived on January 30 and pointed to levels well above the Fed’s target of 2%. The Fed, regardless of leadership, will have challenges balancing the two mandates in the year ahead.
President Trump ended the suspense over his choice for new Fed Chair by naming Kevin Warsh, a former Fed governor who played an instrumental role in guiding Fed policy through the 2008 financial crisis. The changing of the guard in May could be complicated by politics, specifically the Department of Justice’s threatened indictment of current chair Powell for statements made to Congress regarding the cost of renovating the Federal Reserve building. In a surprising turn, Republican Senator Tom Tillis has gone on the record saying he will not support any nominee while the Powell case is unresolved.
The impact of White House intrusions into everything from Fed independence to unilateral foreign interventions may prove to be one of the defining themes of 2026. How it will affect investors is one of the known unknowns, but if January is a barometer on this account, the impact may be muted. Still, the broadening investment trends of January are encouraging. We are hopeful that investment leadership will continue to shift toward the high-quality, reasonably priced, proven companies we prefer.