January Market Wrap —  When Liquidity Fades, Short-Term Fundamentals Matters More

Markets kicked off the year on a positive note, with international stocks once again doing the heavy lifting. Emerging markets led the way, gaining nearly 9% in January, while the S&P 500 rose a more modest 1.5%. The Nasdaq lagged other major indices, posting the weakest performance of the group, though it still finished the month up about 1%.

At the sector level, performance was broadly constructive but uneven. Energy stood out sharply, surging 14.2%—nearly double the return of the next-best sector, Materials. Financials had the weakest showing, down 2.4%, while Technology and Healthcare were essentially flat on the month. The dispersion we saw across sectors is consistent with a market that’s becoming more selective and less driven by broad momentum.

Fixed Income & Treasury Yields

Treasury yields were relatively stable in January, though most of the curve edged slightly higher. The 1-month Treasury was the lone exception, dipping just 2 basis points to 3.72%. The 3-month and 1-year yields were unchanged, while longer maturities rose modestly by 2 to 8 basis points—hardly a dramatic move, but consistent with a cautious market tone.

Compared with one year ago, the yield curve has steepened meaningfully with clear implications for both stock and bond investors.

For stock investors, a steepening curve often signals that recession fears are easing and that markets expect stronger future growth.  That environment tends to benefit cyclicals (industrials, financials, consumer discretionary). On the flip side, growth and tech stocks may feel some pressure, since rising long-term yields can weigh on valuations by increasing discount rates. 

Macro Update 

On the macro front, the Federal Reserve paused after delivering three consecutive 25-basis-point rate cuts to close out 2025. December’s nonfarm payrolls came in about 23,000 jobs below expectations, though the unemployment rate continued to trend lower for a second straight month. Looking ahead, markets are pricing in only an 11% chance of additional rate cuts at the next FOMC meeting as Jerome Powell approaches the end of his term.

Crypto and Commodities

Commodities saw far more dramatic action. Gold had another standout month, climbing 13.3% and leaving the SPDR Gold Shares ETF (GLD) trading near $445. Silver also posted an exceptional run, finishing 2025 up more than 100% at roughly $62 per ounce. 

Oil prices moved higher as well amid ongoing geopolitical tensions, with Brent crude up 10.4% to $67.70 per barrel and WTI gaining 5.6% to $60.46.

January 2026 will likely be remembered for extreme moves in assets that are typically considered less volatile. Precious metals had surged leading into the final trading day of the month, only to reverse sharply. Gold fell nearly 10% in a single session—its worst one-day drop since 1983—while silver plunged more than 28%, marking its steepest daily decline since 1980. Even with this late-month reversal, the U.S. dollar remains down more than 10% since the start of last year, a key driver behind the broader precious metals rally. Ongoing trade tensions and concerns around rising national debt have only added to this dynamic, reinforcing that volatility is no longer confined to equities alone.

Cryptocurrencies continued to struggle. Bitcoin declined 4.8% in January to about $81,100, while Ethereum fell more sharply, down 9% to roughly $2,700. Since the start of 2025, Bitcoin and Ethereum are down approximately 17% and 33%, respectively, highlighting the ongoing pressure in risk-sensitive assets.

Market Outlook

In early February, the market is experiencing heightened volatility. The current market volatility is a byproduct of three converging pressures: “sticker shock” over massive AI capital expenditures, the disruptive potential of new AI tools on traditional software models, and sudden political uncertainty within the Federal Reserve. 

While tech giants are reporting healthy earnings, investors are increasingly scrutinizing the hundreds of billions of dollars being poured into AI infrastructure, questioning the near-term return on investment (ROI) as companies like Alphabet and Microsoft signal significantly higher spending for 2026. 

This skepticism was amplified this week by a sharp selloff in the software sector; as new automation tools from AI frontier labs begin to tackle complex professional tasks, markets are reassessing whether legacy software subscriptions can withstand such direct disruption.

Adding to this fundamental shift is the macro uncertainty surrounding the nomination of Kevin Warsh to lead the Federal Reserve. His potential leadership introduces a “wait-and-see” dynamic for interest rate policy, which, when combined with a cooling labor market, has triggered a defensive rotation out of high-growth tech and into more stable sectors. 

Beyond interest rates, a key focus is the Fed’s balance sheet. A Warsh-led Fed would likely favor a more deliberate but persistent reduction in excess liquidity, allowing bonds to roll off without reinvestment and keeping quantitative tightening in place longer than markets currently expect. Historically, periods of sustained balance-sheet contraction tend to pressure asset valuations, particularly for those that have benefited most from abundant liquidity (crypto, commodities and high growth stocks).

That said, periods like this are a normal part of market cycles and do not change our long-term investment approach. We are positioned to be cautious but invested, focusing on companies with strong finances, steady cash flow and dividend, and the ability to grow without relying on cheap borrowing. While tighter monetary conditions may create short-term market pressure, we believe they ultimately support healthier markets and better long-term outcomes for patient investors.