The Month Ahead: January 2026

The Fed is preparing a 75-basis-point 'parting gift' for markets, but leadership uncertainty creates a volatile ceiling.

As we navigate the back half of January 2026, the primary narrative has shifted from 'if' the Fed will cut to 'how much' they will signal for the transition. With a 96.6% probability of a 75bps cut at the January 28 meeting, markets are effectively front-running a regime change. However, the S&P 500 (GSPC) remains tethered near 6,940 as the 'Warsh Trade' introduces a new variable: the potential for a more disciplined, hawkish successor to Jerome Powell.

What December Taught Us

December 2025 was a month of resilient labor data clashing with sticky inflation. The S&P 500 (GSPC) closed the year with momentum, but the underlying data suggests a cooling that the Fed can no longer ignore. While the Dow Jones Industrial Average (DJI) retreated slightly to 49,363 by mid-January, the broader trend remains defined by the anticipation of liquidity injections.

Winners & Losers

  • Outperformers: Bitcoin (BTC=F) surged toward $96,806, acting as the primary beneficiary of dollar-debasement fears and leadership speculation.
  • Underperformers: WTI Crude Oil (CL=F) slid to $59.30 per barrel as global growth concerns outweighed geopolitical risk premiums.

The key lesson from December is that the 'bad news is good news' trade has returned. Despite CPI remaining at 2.7%—well above the 2% target—the retreat in the unemployment rate to 4.4% has given the Fed a narrow window to cut aggressively before the labor market softens further.

Catalyst Calendar

Week 3: January 12–18

  • Initial Jobless Claims: 198,000 (Actual) vs. 215,000 (Estimate). This surprise strength in labor initially pressured bonds (bonds).
  • Consumer Sentiment: Markets weighed the $250 billion US-Taiwan trade deal investment.

Week 4: January 19–25

  • Pre-FOMC Blackout: Fed officials go silent, leaving the market to obsess over the 96.6% cut probability.
  • Earnings Season Kickoff: Focus on whether corporate margins can sustain the 6,900+ level on the S&P.

Week 5: January 26–31

  • FOMC Policy Decision (Jan 28): The main event. A 75bps cut is the base case; anything less is a shock.
  • Jerome Powell Press Conference: Likely his penultimate appearance, focus will be on the 'hand-off' to the next Chair.

The final week of January is the most catalyst-heavy period of the quarter, with the FOMC decision acting as the definitive pivot point for Q1 2026 positioning.

Sector & Factor Setup

Leadership is currently bifurcated between 'Old Guard' industrials and 'New Regime' digital assets. The growth-to-value rotation has stalled as investors await the Fed's verdict.

Momentum Favors

  • Digital Assets: Bitcoin (BTC=F) at $96,806.
  • Precious Metals: Gold (GC=F) holding at $4,596.32 despite a minor 0.30% retreat.

Mean Reversion Candidates

  • Energy: WTI Crude Oil (CL=F) at $59.30 appears significantly mispriced relative to historical winter averages.
  • Small Caps: The Russell 2000 (RUT) is lagging the mega-cap indices.

Factor performance is currently dominated by 'Quality' and 'Momentum,' as the 2.7% CPI print makes 'Value' plays difficult without a clearer path to 2% inflation.

Flows & Positioning

Institutional positioning is currently 'long and hedged.' While the 96.6% cut probability suggests a consensus, the VIX range of 13.38 to 18.10 indicates significant tail-risk protection.

  • Systematic/CTA: Trend-following models remain max-long equities but have started trimming energy exposure.
  • Hedge Fund: Net leverage is at the 85th percentile, with a heavy concentration in the 'Warsh Trade' (shorting the belly of the curve).
  • Retail: Sentiment is 'Greed' territory, driven by the Bitcoin rally toward $100,000.

The primary implication is that the 75bps cut is almost entirely priced in. The risk is a 'sell the news' event if the Fed's guidance for March is more conservative than expected.

The Risk Landscape

Primary Risk: The Hawkish Succession

If Kevin Warsh is officially named as Powell's successor before the Jan 28 meeting, the market may reprice the 75bps cut as a 'one-and-done' move rather than the start of a deep cycle.

Secondary risks include a rebound in CPI toward 3% and a breakdown in the US-Taiwan trade deal implementation. The 10-Year Treasury Yield (TNX) at 4.23% suggests the bond market is already skeptical of a long-term low-rate environment.