As we close the books in January, investors naturally look to early-year market performance as a potential guide for the months ahead.

Historically, concepts such as the “January Barometer” and the “January Effect” have served as popular frameworks for evaluating whether the market’s first month provides insight into full-year outcomes.

While January 2026 was marked by volatility, including policy uncertainty and shifting expectations around the Federal Reserve, the US equity market delivered a constructive “up” month.

For the disciplined investor, this start provides a useful, albeit non-deterministic, piece of the larger 2026 mosaic.

While our crystal ball remains broken, it is important to examine historical patterns to build out a potential path for the remainder of 2026.

Historical Context: The "Barometer" and the "Effect"

The January Barometer

Popularized by the Stock Trader’s Almanac, this theory suggests:

"As goes January, so goes the year."

Statistically, when the S&P 500 finishes January in positive territory, the remainder of the year (Feb-Dec) has been higher 80% of the time over the last 40 years, with average annual returns near 15%.

With the S&P 500 up +1.4% this month, history currently leans in favor of the bulls.

This is a good point to remind you that past performance is not indicative of future results.

The January Effect & Small-Cap Leadership

Traditionally, January is a period where small-cap stocks outperform large-caps due to tax-loss harvesting reversals.

In January 2026, we saw a notable resurgence in this trend; the Russell 2000 (the proxy we use for small-cap names) outperformed the S&P 500 (up 5.35% vs. 1.4%), signaling a healthy "broadening" of market participation beyond just mega-cap technology.

You will hear us refer to this as market breadth.

Correlation vs. Causality

While the link between January and year-end returns is observable, research suggests a correlation coefficient of approximately 0.4.

This indicates a moderate relationship, reminding us that while January sets the sentiment, fundamental drivers, such as EPS growth, GDP expectations, etc., remain the true engines of long-term price appreciation.

In statistics, a correlation coefficient of 0.4 represents a moderate positive relationship, suggesting that while January’s performance often aligns with the full year's direction, it is far from a guaranteed predictor.

So, What Does January 2026 Tell Us?

1. A "Broadening" Base is Constructive

The outperformance of small-cap and equal-weight strategies this month suggests that the 2026 rally is not solely dependent on the "Magnificent 7."

This rotation into cyclical and smaller names often reflects growing confidence in a domestic "soft landing."

This is further accelerated if there is a rate-cutting cycle coinciding with the “soft landing.”

2. Resilience Amid Policy Noise

Despite heightened political and policy-related headlines, equities remained resilient.

This suggests that markets may be increasingly focused on the underlying economic baseline (steady growth and stabilizing labor conditions) rather than short-term uncertainty.

3. Seasonal Patterns Have Weakened Over Time

It is also worth acknowledging that seasonal market effects have become less dependable in modern markets, shaped by high-frequency trading, rapid information flow, and shifting fiscal dynamics.

In our view, January’s positive results should be seen as a potential tailwind rather than a forecast.

Like the Federal Reserve, we remain data dependent as key labor and inflation reports approach.

What Should We Continue to Monitor?

Earnings Durability & 2026 Guidance

With 4Q25 earnings tracking toward a fifth consecutive quarter of double-digit growth, the focus has shifted from "policy noise" to the 2026 outlook.

With valuations elevated, markets are scrutinizing management guidance to determine whether the ~7,800 S&P target is achievable.

Key to this transition is whether massive AI infrastructure spend is finally translating into tangible margin expansion across broader sectors like Industrials and Financials.

These are all data points that we will be monitoring closely throughout the year.

The "Neutral" Fed

Following the January pause, markets will parse every word from Fed officials for clues on whether the 3.50%–3.75% range is the "terminal" floor or if more easing is on the table for mid-2026.

The current expectations are for a 25 bp cut in the back-half of 2026.

Labor Momentum

The upcoming February 6 Jobs Report will be the ultimate arbiter of whether the 4.4% unemployment rate is a stable plateau or a mounting risk.

Conclusion

From a historical perspective, January 2026 delivered a constructive start, supported by positive returns and broader market participation.

However, with valuations elevated and economic crosscurrents still present, markets may remain sensitive to earnings results and incoming data throughout the year.

This is an area where our adherence to our robust 5-step due diligence process is critical, as it allows us to take proactive steps as conditions change throughout the year.

As always, we remain committed to disciplined portfolio management and a focus on underlying fundamentals, not short-term market noise.

As we have stated previously, your Financial Peace of Mind is paramount, and we will continue to monitor the pulse of the economy and markets while keeping your long-term goals at the center of every decision.

We hope you are having a great start to 2026 and look forward to seeing you again soon.