January 2026 Market Update

January’s labor data reinforced the trajectory established throughout 2025: employment growth is unmistakably weakening. According to the Bureau of Labor Statistics, total nonfarm payrolls rose by a revised 48,000 in December, with private payrolls up 37,000. Manufacturing employment declined by about 8,000 jobs in December, underscoring the ongoing softness in goods-producing industries. For the year 2025 as a whole, payroll employment initially appeared to increase by roughly 580,000; however, the annual benchmarkBenchmarkThe index or fund a portfolio's results are compared against, chosen to represent the market segment the portfolio invests in. revisions reveal that growth was actually only 181,000. This is down sharply from about 2.0 million in jobs growth in 2024, marking the third consecutive year of deceleration in employment.1

What makes this cooling particularly notable is its persistence alongside still?elevated wage growth. Average hourly earnings are rising at roughly 3.8% year-over-year, modestly above pre?pandemic norms and still somewhat high for a clean return to 2% inflation. This combination of decelerating hiring paired with sticky wage pressures keeps the Federal Reserve in a difficult position, unable to declare either full victory on inflation or clear urgency on employment.

If one event defined January market psychology, it was the January 30 nomination of Kevin Warsh to succeed Jerome Powell. While the move resolved months of succession anxiety, it introduced a fundamental shift in how the market views the Fed’s reaction function.

Warsh, a former Fed governor during the 2008 financial crisis, is widely seen as more willing to rethink the framework for monetary policy rather than simply extend the Powell status quo. Whereas the Powell era placed heavy emphasis on incremental, data?dependent adjustments guided by monthly prints, Warsh has highlighted the importance of underlying structural forces, including productivity and the supply side of the economy. His recent commentary, emphasizing the role of technology and potential AI?driven efficiency gains, has been interpreted as opening the door to somewhat lower policy rates if disinflation and productivity trends remain favorable, even in the presence of still?tight labor markets.

Warsh has long been critical of mission creep and the distortions associated with prolonged large?scale asset purchases, suggesting a bias toward steady or even accelerated balance?sheet reduction. For investors, that combination points to a different mix of tools: more openness to adjusting the price of money via the policy rate, alongside a firmer commitment to continuing quantitative tightening.

In markets, this emerging “Warsh regime” has become a key lens for interpreting January’s price action. A Fed seen as more willing to normalize its footprint in bond markets while preserving hard?won inflation credibility supports a stronger dollar and reduces the appeal of pure “debasement” trades. The question for the second half of 2026 is less “Will the Fed cut rates?” and more “How will the real economy and risk assets – including equities, corporate credit, and other growth-sensitive investments – respond if the Fed continues to step back from its outsized role in the Treasury and mortgage markets?”

Equity markets entered January with constructive momentum following December’s largely flat performance, as leadership broadened beyond a narrow set of mega-cap technology stocks. Small- and mid-cap equities outperformed for much of the month, equal-weighted indices led their cap-weighted counterparts, and sector rotation pointed to a healthier and more balanced market structure. While mega-cap AI-linked stocks continued to perform well in absolute terms, returns became less concentrated, signaling a gradual shift away from the narrow leadership that had dominated much of 2024 and 2025.

January validated the framework outlined in December: markets have entered a regime where selectivity and risk management matter more than broad-based momentum. The month rewarded investors who were diversified beyond market-cap-weighted, AI-heavy exposure and who avoided severely overcrowded momentum trades in alternative assets, most notably precious metals such as silver and large cryptocurrencies like bitcoin, which experienced sharp reversals as positioning unwound. Investors benefited instead from improving market breadth rather than chasing consensus-driven momentum. As markets move further into 2026, this environment favors disciplined portfolio construction, an emphasis on diversification, and a willingness to look beyond recent momentum.