January brought another month of steady economic momentum across the United States, marked by strong household spending and ongoing strength in the services sector. Lower home loan rates helped revive buyer interest, giving the housing market a noticeable lift as the new year began.
Even so, economic signals remain mixed. The manufacturing industry has now posted declines for ten straight months, and while inflation has eased from its highs, it’s still running warmer than policymakers would prefer. Meanwhile, the Federal Reserve is maintaining a cautious stance on rate cuts, despite rising calls for a more aggressive approach.
Here’s a breakdown of what took place in January, what’s driving the headlines, and the areas we’re watching closely.
Major U.S. Stock Indices
After spending much of the past few years overshadowed, small-cap companies staged an impressive comeback early in 2026. The Russell 2000 outpaced the S&P 500 and Nasdaq for 14 consecutive trading days, marking a notable shift in market leadership.
This trend suggests that investors are widening their search for opportunities, moving beyond mega-cap technology names to areas more tied to local economic conditions and companies that benefit from more favorable financing environments.
Overall performance for January included:
- The S&P 500 rose by 1.37%.
- The Nasdaq 100 added 1.20%.
- The Dow Jones Industrial Average led the group with a 1.73% gain.
Economic Snapshot
The economy carried strong momentum into 2026. Third-quarter 2025 GDP reached an annualized rate of 4.4%, the best in two years, while early estimates for Q4 pointed to continued strength in the 3–4% range. However, signs indicate that growth may now be leveling off.
Recent high-frequency indicators show activity narrowing, with services and government spending doing more of the heavy lifting while private-sector demand becomes more uneven. Most economists anticipate a shift toward a steadier 2% trend for the remainder of 2026—solid, but far from the brisk pace of last year.
Labor data reflected a cooling job market. December payrolls increased by just 50,000 compared with 2024’s monthly average of 168,000, with reductions concentrated in retail and manufacturing roles. The unemployment rate stayed at 4.4%, reinforcing the idea of a gradual slowdown rather than an abrupt downturn.
Wage pressures have eased, helping keep household purchasing power intact while also reducing the risk of renewed inflation. The Consumer Price Index registered a 2.7% increase year over year in December, inching closer to the Federal Reserve’s target but not quite reaching it. A complicating factor: producer prices saw their fastest monthly increase in five months, reflecting higher costs tied to new tariffs.
At its late-January meeting, the Federal Reserve held interest rates unchanged at 3.5–3.75% and indicated that only one potential rate cut remains on the table for 2026. The Fed emphasized a data-driven approach and reaffirmed its independence as political voices push for a different course.
The ISM manufacturing index stayed in contraction territory for the tenth month at 47.9. Soft order volumes, declining inventories, and increased layoffs—exacerbated by tariff-related pressures—continue to weigh on the sector. In contrast, services industries are still expanding, existing-home sales climbed 5% in December thanks to lower mortgage rates, and credit markets remain calm with spreads near historic lows. The result is a split economy: manufacturing softness on one side and consumer resilience on the other.
Our Outlook
We’re operating in an environment characterized by moderate growth, ongoing disinflation, and a Federal Reserve nearing the end of its easing cycle. One encouraging trend is the widening of market leadership. After years of outsized returns in mega-cap technology, smaller companies and cyclical sectors are beginning to catch up, offering fresh opportunities for diversification.
Still, this late-phase expansion brings its own uncertainties. Policy shifts, geopolitical tensions, and uneven data are likely to create occasional bouts of volatility. Our approach balances participation in cyclical areas with a continued focus on high-quality assets, disciplined valuations, and maintaining liquidity for new openings that may emerge.
As always, if you’d like to talk through these developments or review your portfolio, our team is here and ready to help.
