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May you live in interesting times, is supposedly a Chinese curse* and meant to be vaguely threatening. Living in times of tumult, change, and growth is transformative... but it can also be difficult or dangerous.
We live in interesting times.
New year, new surprises
The first full trading week of 2026 wasted no time reminding investors that we’re all still suckers for headlines. Markets digested a hefty dose of geopolitics in Venezuela, fresh labor market data, shifting policy signals out of Washington, and unanswered questions around tariffs. Despite a full week of news, U.S. equities moved higher, bond markets stayed orderly, and investors continued to reward business resilience rather than panic over a little chaos. After a busy 2025, investors might be tuning out the noise.
Major equity indexes finished the week firmly in the green. The S&P 500 gained about 1.6 percent, reaching new highs, but small caps stole the spotlight. The Russell 2000 surged roughly 4.6 percent, signaling a growing appetite for cyclical sectors outside the tried and true large-cap technology stocks. The equal-weight S&P 500 outperformed its market-cap-weighted cousin, a welcome sign that market leadership is broadening beyond the narrow group of name-brand mega-cap stocks.
Equal weight S&P 500 edging out the usually dominant cap-weighted S&P 500
Utilities, consumer durables, and communications lagged, reflecting a drift away from defensiveness. Credit markets have held up well this week. Investment-grade and high-yield corporate bonds posted gains, municipal bonds outperformed treasuries, and spreads tightened in mortgage-backed securities. Gold rose alongside equities as investors kept one eye open to monitor geopolitical risk. Crypto markets, meanwhile, failed to sustain momentum. Bitcoin finished modestly lower after an early-week breakout attempt.
Volatility picked up midweek as policy headlines hit defense companies, housing, and energy stocks, but the market ultimately absorbed the shocks without much lasting damage. It appears the Administration’s affordability proposals will keep coming, the latest of which suggests a cap on credit card interest rates. If you think the financial industry will bow down to lending constraints, don’t bank on it.
Economic trends
The bond market spent the week doing what it does best, quietly signaling caution with mild annoyance. Treasury yields drifted lower overall as uneven labor and housing data reinforced the idea that the U.S. economy is cooling but not stalling. The 10-year yield ended the week at 4.17% after briefly pushing higher earlier in the week.
December’s labor market data confirmed a slowdown that has been building for months. Job growth came in at 50,000, below expectations, and prior months were revised painfully lower. I expect we’ll get a small negative revision in December next month. Job gains in 2025 slowed sharply to only 584,000 compared to over 2 million in 2024. Average monthly job gains in the last six months of the year were a paltry 14,500. Remarkably, unemployment actually fell to 4.4%, down from a downwardly revised 4.5% in November. A drop in the number of unemployed, likely from furloughed workers back on the job, paired with a dip in the labor force, gave us a nice little surprise.
As frustrating as conditions appear to be, the job market is losing momentum but not cracking. Given the slow growth of the labor force, what used to be considered dismal monthly job growth could be enough to keep us on track with moderately stable unemployment.
Manufacturing data remained poor, with the ISM manufacturing index contracting for the tenth straight month, while services activity strengthened. Price pressures eased modestly in services but remained high in manufacturing inputs. Taken together, the data support a Federal Reserve that can pause to let the dust settle. The current trajectory still points toward one to two rate cuts later in 2026, assuming inflation continues to behave (see you on Tuesday).
Geopolitics and policy whiplash
Geopolitical developments in Venezuela dominated weekend headlines. While Venezuela holds substantial oil reserves, its near-term contribution to global supply remains totally unknown due to infrastructure challenges. As much as the Administration wants to utilize domestic energy companies to jump-start production, they don’t seem keen to sink money or time into such a volatile situation yet.
Oil ended the week higher, but the move was choppy and driven more by uncertainty than real optimism. Over the longer term, any successful rebuilding of Venezuelan production could add to global oversupply rather than tighten it, something the U.S. shale producers know all too well. Energy markets remain structurally complex, and unwinding decades of malinvestment doesn’t offer a clear path to profits.
Other policy announcements from the White House injected additional volatility and confusion into several industries. Defense stocks swung sharply as investors reacted first to restrictions on capital returns and then to proposals for higher military spending. Housing-related stocks followed a similar path, initially falling on concerns over institutional buying limits, then rebounding after the administration publicized a proposal for Fannie Mae and Freddie Mac to start buying mortgage bonds to lower mortgage rates. The mortgage bond-buying proposal cut mortgage rates by 20bps overnight, leading to some fresh lows on new loans.
These episodes echoed a theme of 2025: policy risk is ever-present and not restricted to just government-connected sectors like defense or consulting. On the bright side, markets are getting good at discerning what is relevant and quickly repricing once details emerge.
What this means for investors
This week reinforced that markets remain focused on trends rather than drama. Practice makes perfect. Economic growth in Q4 shows signs of slowing from a strong pace but remains above the long-term trend. The Atlanta Fed’s GDPNow is projecting a lofty 5.1% Q4 growth, but that should come back down to Earth as more data becomes available.
Earnings expectations for 2026 have moved higher, and while the Mag7 are obviously leading in growth expectations, the rest of the S&P 500 is no slouch. FactSet projects the S&P 493 (everyone minus the Mag7) will achieve low double-digit earnings growth in 2026. The S&P 500 as a whole is projected to increase net profit margins by another 1 percentage point, hitting another all-time high of 13.9%.
Source: FactSet
Financial conditions continue to remain at their easiest since mid-2021, per the Chicago Federal Reserve. Policy and geopolitical headlines will undoubtedly continue to create short-term volatility, but they have not yet changed the broader investment environment.
For investors, diversification is still regaining relevance. If you’re still sitting in a U.S. large-cap-only portfolio, it’s time to get with the program. Broader equity participation, strength in small and mid-caps, and stable credit markets all argue against an overly defensive stance. Growth expectations and net profit margin forecasts are strong. At the same time, cooling labor data and ongoing policy uncertainty are reasons enough not to get too excited. A balanced approach that leans into domestic, international, and alternative growth opportunities is still the most durable strategy as 2026 gets underway.
Related: Markets Hit a Fog Bank: Why the Fed’s Blind Spot Is Driving This Volatile Reset