Jan 12, 2026

“It is not true that Congress spends money like a drunken sailor. Drunken sailors spend their own money. Congress spends our money.”

 Dr. Art Laffer

It’s been quite a start to the year, and we are only nine days in. Here are the numbers. The S&P500 gained 1.07%, the Dow Jones Industrial Average did better adding 2.12%, the Nasdaq was also up 1.08%, Internationally, the FTSE 100 joined the party up 1.74%, and the MSCI-EAFE added 1.6%, The 2-Year Treasury paid 3.538% and the 10-Year yield was 4.167%,

Obviously, geopolitics has been in focus, but so far at least, the markets have largely ignored the news.  Even oil prices, which you might at first think would react to what’s taking place in Venezuela and Iran, haven’t moved much at all since the end of 2025. But we have seen an interesting rotation away from the Mag-7 type stocks towards other sectors of the market, such as small-caps and value stocks. Interest rates haven’t moved much, either, as the economic indicators are sending conflicting signals (as always).

As Alex Rule of Barrons reports, “Rotation Day. So far, 2026 is looking like the year of the underdog. While the biggest technology companies, known as the Magnificent 7, are sliding, small-cap stocks are having a banner start to the year. The 2026 score card shows the Roundhill Magnificent 7 down 0.1% in 2026 versus a 5% gain for the small-cap focused Russell 2000. “ Karishma Vanjani also from Barrons, argues that the rotation reflects optimism from investors about the U.S. economy. “Small-caps would benefit most from an uptick in economic growth,” Small-caps are also beneficiaries of recent interest rate cuts and those perhaps still to come because they often rely on debt to fuel their cash-poor operations. There’s also the matter of valuations.” After a long bull-market, large-cap stocks are expensive. The S&P 500 fetches 22.3 times estimated earnings for the coming year. That’s a good bit above the five-year average of 20 times. But small-caps have been left behind. The S&P SmallCap 600, which is an index of profitable small-cap names, trades at just 13.2 times 2026 estimates, a multiple that’s below the five-year average of 14.2. (Translation: Good value)

Interest Rates? The Federal Reserve kept a lid on big market bets last Friday: the CME FedWatch tool shows an 84% chance of a January pause and many analysts now expect just one cut in 2026. That “higher-for-longer” backdrop leaves earnings season, which ramps up in mid-January, as the likely near-term catalyst — stocks with recent analyst revisions could see outsized moves when results start rolling in. Expect inertia until we get a new Federal Reserve chairman in May.

The labor market? U.S. employers added a modest 50,000 jobs in December while the unemployment rate ticked down to 4.4%, a mix that leaves investors weighing still-weak hiring against a tighter labor market. Markets are parsing what that means for the Federal Reserve’s path on rates, with traders watching for clues on whether rate cuts will be delayed.

This has translated into improving consumer sentiment, which of course lags, but will affect spending and profitability. The University of Michigan’s gauge of consumer sentiment rose to 54 in a preliminary January reading from 52.9 in the prior month. This is the second straight gain and the highest level of sentiment since September. “Consumers perceived some modest improvement in the economy,” the survey found, although sentiment remains nearly 25% below last January’s reading. Economists polled by the Wall Street Journal had expected sentiment would rise slightly to 53.4 in January.

Finally, the housing market, some very good news. Mortgage rates fell sharply last Friday after President Donald Trump said he is directing mortgage giants Fannie Mae and Freddie Mac to buy $200 billion in mortgage bonds, a rare federal push into the housing finance pipeline that is already reshaping rate expectations and reigniting debate over Washington’s role in a market that has priced out many buyers.

“Mortgage Rates are NOW 5.7%! Mortgage costs were HUGE under Biden (around 8%). That’s why almost no young families could afford a home. With my focus on Housing Affordability, and after I authorized Fannie Mae and Freddie Mac to invest their cash, and BUY $200 Billion Dollars in Mortgage Bonds, Mortgage Rates moved down to 5.7%. This is GREAT news for American Families, and real cost relief. We are bringing Housing Costs DOWN, and putting Americans FIRST!,” the post read.

Fannie Mae and Freddie Mac, which have operated under government conservatorship since the 2008 financial crisis, do not originate home loans. Instead, they buy mortgages from lenders and either hold them or package them into mortgage-backed securities, or MBS, that can be sold to investors, according to the Federal Housing Finance Agency. Mortgage News Daily’s national average index for a 30-year fixed mortgage showed 6.06% on Jan. 9, down from 6.21% the prior day, with the site’s table listing the prior-year rate at 7.15%.Other market coverage, citing Mortgage News Daily, reported a larger one-day move that briefly put the 30-year rate at 5.99%, a psychologically important threshold for buyers and refinancers. Even with lower rates, affordability remains constrained by prices and inventory. The National Association of Realtors said the median existing-home sales price was $409,200 in November 2025.

Meanwhile, U.S. household wealth reached a record $181.6 trillion in September 2025, up from $175.6 trillion in July, according to the Federal Housing Finance Agency. Expect some rebalancing the next few weeks as we assess the gains and bring allocations back in line.

Mike