January 2026 Market Update
By Brian Andrew, CFA®, Chief Investment Officer
The beginning of 2026 has already been interesting from a market perspective, resulting from the transformation happening in the stock and bond markets. Geopolitics have also played a role and we believe that will continue to be at the forefront of investors’ minds as the global order is also transforming.
It’s important to keep in mind that geopolitics can move markets on a short-term basis, though they don’t always affect our longer term secular views.
2025 was a great year for asset price appreciation. U.S. stocks rallied more than 17%, bond returns exceeded 7%, and some assets, like gold, were up nearly 70%. However, as we enter 2026, it’s important to consider the inflection point markets are facing and the potential impact on asset prices and portfolio construction.
Bond Markets
The bond markets inflection point has to do with the Federal Reserve’s interest rate policy. We’ll get an idea of how that policy will play out in 2026 this week as the Fed meets and provides us with an update on their perspective. Two things will drive them in 2026: the level of inflation and the level of unemployment.
Inflation has been declining, though it has been above the Fed’s target for quite some time. That may suggest the target of 2% is softer than the market originally anticipated. Any drifting down in the direction of that target will signal to investors that the Fed will continue reducing interest rates. With oil prices having risen and tariffs back in the news, we will have to keep an eye on goods prices as we move through the first quarter.
While the unemployment rate has been rising due to slower job growth, we are seeing the beginning signs that the market for jobs is improving. This could mean that the unemployment rate remains near 5%, a level that the Fed is comfortable with, suggesting that interest rates do not move lower. Should we see the economy strengthen and the jobs market improve faster, we could see higher short-term interest rates if the Fed changes course.
Equity Markets
The stock market is going through its own transformation. During most of 2025, the artificial intelligence story led the largest technology stocks higher. As we saw in the fourth quarter, many of the Magnificent 7 stocks did not outperform the S&P 500 Index, and the market began its transition away from tech leadership.
Now in 2026, we see strength from small-cap stocks, in particular, the Russell 2000 Index, which represents smaller companies, is up over 7%, while the broader S&P 500 Index is up only 1% this year. Smaller companies will benefit from the tax bill passed in 2025, and their underperformance over the last several years positions them with better valuations than the largest companies. Still, it is a little early to evaluate their appreciation based on a stronger economy.
You can also see the transition in the U.S. stock market since the beginning of this year by looking at the sectors of the market that are performing best. They look very different from what we saw last year. The energy, materials, and consumer staples sectors have performed well since the beginning of the year, providing returns of 8% to 10%. Technology stocks are up less than 2.5%, and financial stocks are down this year.
In our portfolios, we have exposure across all sectors. However, we are continuing to diversify away from the market’s best performers toward companies whose valuations appear more attractive and whose earnings growth shows good potential.
Finally, we have seen the rally in metals, especially gold, continue this year because of the uncertainty surrounding U.S. foreign policy. In a matter of weeks, the U.S. arrested the head of Venezuela and discussed the potential benefits of owning Greenland. We expect that as investors digest this rhetoric, we will see risk-off assets perform well, though we are reticent to start positions in such elevated assets.
2026 will be a year of transformation for markets and geopolitics. Portfolio construction is meant to take advantage of that, and diversity of asset ownership will provide risk management.
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