Weekly Newsletter: January 12, 2026
Walking on sunshine is the early theme for the year. The early week geopolitical news gave way late in the week to plain old economic data. Through it all, the markets shrugged and moved steadily higher. The economic data of the week was jobs, the first decent read since the government shutdown. The data did little to clear the air about how strong or weak the jobs market is today. There remains a debate about how many new jobs are required to maintain a stable employment rate. Recent data, albeit a few months old, might suggest something around 40k plus or minus. Even with revisions, the monthly non-farm payrolls hit that mark. The weekly unemployment claim figures tend to support a relatively stable jobs market. If the Fed is really worried about jobs, it has not been in these reports. A potential fly in the ointment is wage growth, which was below recent inflation data. If wages fail to match inflation, consumer spending may decline, jeopardizing overall growth. Due out this week will be a fresh reading on inflation. As energy prices continue to decline, and implied housing prices moderate, it may be possible to see inflation get even closer to the Feds 2% target, opening the door for easier policy. A stable employment picture and moderating inflation is a Goldilocks story the markets would love to hear.
While there remains plenty of worry on the geopolitical front, it is becoming increasingly evident that the market impact is fairly short. The overall economy and earnings continue to be the key drivers of market gains. To that end, in addition to the inflation data due this week, the banking sector kicks off earnings season. The usual focus on earnings and conditions within each company’s markets will be watched closely. One other item will be the tariff talk. A year ago, tariffs were talked about, but were effectively zero. Fast forward to today, the effective tariff rate is in the mid-teens and rising. We see it in the most recent trade data, where the trade deficit has fallen dramatically. What companies have to say about their revamped supply chains, new cost structures, and business impact will be scrutinized. The usual discussion around AI will also be a feature. The inflation data will be pulled apart to determine what tariff impact there is/has been during the last quarter. Fears of significant inflation and economic slowing have yet to come to pass. Some of the data is pointing to a reacceleration in growth. 2026 may be the year that we find out the true impacts of policies begun in 2025.
Two parts of the bond markets are signaling economic strength: the yield curve and high-yield spreads. The difference between 2 and 10-year yields has been getting larger over the past two years. While still historically narrow following a very deep inversion early in 2023, it is a sign of a healthier economy. The high yield spreads vs. treasuries are narrowing, pointing to confidence that poor creditworthy companies can refinance their debt easily and at favorable rates. When recession worries increase, high yield spreads widen and the curve flattens, not at all what is happening in the market today. The inflation report could have a big impact on the bond market as inflation expectations remain high.
The chatter about AI and tech has moved to page 3, while other parts of the market enjoy some time in the sunshine. Small stocks are up over 5% just in the first week of the year. The shift away from tech continues as some of the largest losers already this year are sprinkled with some of the Mag 7 names. Unlike past periods, usually marked by recessions, this shift in leadership does not have a catalyst. It is possible that the frenetic spending on data centers, chips, and power is giving investors a reason to pause. Questions about a changing business model, more debt on the balance sheet, and an unknown payoff for the spend may be just the tip of the iceberg for a less-than-enthusiastic reception for tech in 2026. Overall, markets were driven higher by earnings growth of 14%. This year’s estimates are 18%+. How closely stocks follow those estimates, as they get adjusted for reality, will determine whether stocks enjoy another year in the sun.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.