Markets came out of the gates strong in 2026, surviving a bout of volatility to build on the gains from the previous year. The S&P 500 added +1.5% in January after returning +18% in 2025.
Smaller company stocks surged to start the year after lagging their large cap peers for the fifth consecutive year in 2025, with the Russell 2000 Index adding +5.4% this month.
Overseas stocks continued their dominance, as the MSCI ACWI ex-US index gained +6% in January after a +32% gain last year.
Within fixed income, the Bloomberg Aggregate Bond Index ticked up +0.1% to start the year despite long-term rates creeping higher during the month. Bond markets received their biggest piece of news on the last day of the month, when President Trump announced Kevin Warsh as his nominee to be the next Fed chair, who is seen by traders to be more hawkish on interest rates than some of his competitors for the seat.
This news was most felt in precious metals, where gold prices fell 9% on the day of the announcement, though gold still recorded yet another record closing high after a January gain of +14%.
One month into the new year, our proprietary Three Dials allocation framework continues to hold steady, as we summarize below:
The S&P cracked the 7,000 level in January for the first time in history, despite a negative contribution from the previously high-flying technology sector. With the rally in small- and mid-caps and continued strength international, we’re seeing broad-based support for an ongoing bull market. As such, our Momentum Dial remains in a Positive position.
Consumer confidence fell in January to its lowest level since 2014, surpassing even the pandemic depths of 2020 as job market concerns continue to weigh on individuals’ perception of the economy. This pessimism is starting to impact big ticket spending, with the National Association of Realtors reporting record low pending home sales in January. We continue to keep our Fundamental Dial in a Negative position.
Despite what has been a strong corporate earnings season so far, investors are heavily scrutinizing results to justify stretched valuations, most notably with Microsoft’s stock falling 10% despite beating revenue and earnings expectations given underperformance around AI-related aspects of the business. With stocks priced to perfection around lofty growth expectations, our Valuation Dial remains Negative.
On balance, our composite positioning remains somewhat defensive, with one dial in a Positive position but two dials remaining Negative.
Sources: Morningstar