As we moved through January, the U.S. economy kept pushing forward, supported chiefly by steady consumer activity and a solid services sector. The housing market also regained momentum as falling mortgage rates encouraged more buyers to reenter the market.

Still, several underlying pressures are becoming harder to ignore. Manufacturing has now declined for ten straight months, and while inflation has eased somewhat, it remains elevated. At the same time, the Federal Reserve continues signaling a conservative stance toward lowering rates—even as political voices urge faster action.

Below is a breakdown of what shaped the markets in January, why it mattered, and the trends we’re keeping an eye on.

Major U.S. Stock Indices

Early 2026 finally brought renewed attention to small-cap stocks. After years of trailing behind the high-profile “Magnificent 7,” the Russell 2000 staged an impressive run, beating both the S&P 500 and Nasdaq for 14 sessions in a row.

This shift suggests that investors are looking beyond mega-cap tech names and turning toward companies more closely tied to the domestic economy—especially those poised to benefit from improved financing conditions.

Overall market performance included the following:

Economic Snapshot

The U.S. entered 2026 with solid economic momentum. Third-quarter 2025 GDP reached a 4.4% annualized pace—its strongest showing in two years—while fourth-quarter estimates projected 3–4% growth. Still, these figures likely marked the high point of the cycle.

Recent indicators show growth narrowing, with more of the weight carried by services and government spending rather than broad private-sector demand. Economists expect output to settle closer to a 2% trend throughout 2026—a level that is respectable but no longer surging.

December job growth came in at 50,000, well below the 2024 monthly average of 168,000. Weakness was concentrated in retail and manufacturing. The unemployment rate stayed at 4.4%, pointing to a gentle cooling rather than a rapid downturn. Wage increases have slowed as well, helping maintain purchasing power without adding pressure on inflation.

Inflation moderated, with headline CPI rising 2.7% year over year in December—approaching, but not quite meeting, the Fed’s goal. On the producer side, costs saw their fastest monthly increase in five months, reflecting the impact of tariffs working their way through supply chains.

At its late-January meeting, the Federal Reserve kept rates unchanged at 3.5–3.75% and indicated that only one more cut is likely this year. The Fed underscored its commitment to data-driven decision making, despite mounting political pressure for more aggressive easing.

The manufacturing sector remains under strain, with the ISM index stuck in contraction territory for the tenth month at 47.9. Demand remains weak, inventories are shrinking, and tariffs continue to weigh on producers. In contrast, service industries are still expanding, housing sales jumped 5% in December thanks to lower mortgage rates, and credit markets remain calm with spreads near long-term lows. The result is a split economy: manufacturing is under stress, while consumers show resilience.

Our Outlook

We see the current environment as one defined by steady but slower growth, receding inflation, and a Federal Reserve nearing the end of its rate-cutting cycle. One encouraging development is that market leadership is beginning to broaden. After several years dominated by mega-cap technology stocks, smaller companies and cyclical sectors are starting to catch up—creating openings in areas that haven’t fully participated in the recent rally.

Even so, this is a mature stage of the economic cycle. Policy uncertainty and geopolitical risks are likely to trigger occasional bouts of volatility. Our approach emphasizes balancing exposure to cyclical opportunities with maintaining high-quality holdings, keeping valuations in check, and positioning ourselves to take advantage of attractive entry points when they appear. In markets like this, careful selection and risk management remain essential.

If you’d like to discuss how these developments relate to your portfolio, our team is here and ready to help anytime.