January 2026 Market Update

Since the December FOMC meeting, when the Fed decided to once again embark on small asset purchases, otherwise known as QE, liquidity has improved. Mostly through the level of reserves in the banking system being boosted by the asset purchases. As previously mentioned, these actions will not prevent employment growth from declining. As the market is forward looking, gold and silver prices have soared in response to this policy change from the Fed.

Consequently, at the January FOMC meeting, the committee decided not to lower interest rates, citing risks of inflation once again rising. It is likely the near-term reinflation risks the Fed claims to see stems from the resumption of QE, which has led to rising liquidity and speculation on commodities via currency devaluation, rather than employment growth. Keep in mind if employment growth struggles and lending contracts, QE will have to grow much larger in the months ahead to keep bank reserves from contracting and liquidity in the financial markets.

Reserve balances

Loan growth at Small and Domestically Chartered Commercial Banks is slowing.

Let’s take a quick glance at the economy below.

The percent change in consumer spending levels.

The percent change is common measures of consumer inflation.

The Percent change in employment.

The Percent change in the measure of joblessness.

A measure of new residential construction.

The 10 year interest rate, basis of a 30 year mortgage contract.

The personal savings rate near all time lows.

The real import of goods into the United States of America.

MacroVex Capital believes the following two charts below are the most important charts in finance. We believe every individual, no matter their demographics can unite behind these two charts. They need to be moving up and to the right instead of down and to the right for Americans to feel more prosperous and free.

Real personal income growth ex government transfer payments.

Net savings as a percent of of gross national income.

Per Bloomberg, the economy is Going In the Wrong Direction.

The U.S. economy continues to hum along with the help of taxpayers through large deficit spending, otherwise known as fiscal dominance. But, as previously mentioned this fiscal policy is leading to unaffordable living conditions and a shrinking middle class. The economy needs to be transitioned away from an asset-price-growth based model reliant on debt and stimulus to an innovation and production based model reliant on lower interest rates and stable prices.

In recent years the stock market has become detached from the real economy due to fiscal dominance policy combined with accommodative monetary policy. Investors are hoping this policy mix continues to push asset prices up while bringing interest rates down. But as the government takes control of a larger piece of the total economic pie at the expense of a shrinking middle class, interest rates are no longer responding to the real economy just the same as the stock market. For these reasons, we believe the only way mortgage rates are going to meaningfully come down is through a recession.

Regime change at the Federal Reserve. On Friday, President Trump nominated Kevin Warsh to be the next Chairman of the Federal Reserve when Jerome Powell's term end in mid May of this year. Kevin Warsh represents real change at the Fed and is known for saying that QE is nothing more than "reverse robin-hood". Warsh has been highly critical of the Feds policies since Ben Bernanke started QE in 2008 in response to the great financial crisis. Warsh is in favor of shrinking the Fed's balance sheet, the underpinning of continuously higher bank reserves, rising costs, and asset prices since 2008. In effect, Warsh is willing to trade the wealth effect for lower interest/mortgage rates and stable prices. This is what the real economy needs to once again return growth to the middle class/main street.

Kevin Warsh has been quoted in saying to CNBC's reporter Becky Quick, "I think where we find ourselves is if Washington writ large, were trying to design a set of policies that were good for asset holders, made the stock market go up every day, were bad for the folks that are living on their W2 income, that don't own assets, that just have income, you're taking risks with their paychecks ever day. So what this administration has done over the course of the last several years, especially the last year, is to goose the stock market. That's what this mix of big, irresponsible fiscal policy does." Becky Quick then responded, "If you put these changes in place, would the stock market drop as a result?", Kevin Warsh responds in saying, "Transitions are difficult. That wat I would say it, Becky, is this: if the focus from the central bank were on the real economy, the financial markets will take care of itself. The Real economy us growing strongly, financial markets will be fine, but of the focus is on financial markets, that doesn't necessarily mean the hard working people in the real economy will do as well."

We believe an economic transition is underway, and there is high complacency in financial markets amidst extremely high stock and real estate market valuations. For those who do not understand the real economy, its real problems, and believe all is well simply because the prices of assets are up, the following charts are very important to consider when choosing their asset allocation mix.

S&P 500 Cyclically Adjusted PE Ratio and Warren Buffet Market Cap to GDP Ratio

Bloomberg Average Percentile Valuation Mix

Our MacroVex Capital, S&P 500 fair value estimate model currently indicates fair value for 2025 earnings of $272 and 2026 earnings of $312 between 4,155 and 4,920, down -40% and -29% from the S&P 500, 2026 January closing price of 6,939.

We believe 2026 will be full of economic and political surprises that will force major fiscal and monetary changes that provide some great investment opportunities. Our recommendation is to position portfolios to endure a recession, in a defensive manor, risk off, cash, T-bills, money market funds, short to mid-term 1-10 year U.S. treasury bonds and 10-30 year U.S. treasury bonds at positive carry, 10-year minus 2-year yield curve re-steepening, 10-year minus 3-month yield curve re-steepening, Short USDJPY from 153, and select low duration U.S. equities.

Getting paid to wait for growth assets to be priced at discounts, while being positioned to benefit from bond price appreciation as interest rates decline from downward economic pressure, continues to be a profitable and rewarding strategy. We remain patient and focused on managing risk through 2026.

Disclosure: Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results. This letter is not intended to be relied upon as forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Macrovex Capital, LLC to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projection, and forecasts. There is no guarantee that any forecast made will materialize. Reliance upon the information in this letter is at the sole discretion of the reader. Please consult with a Macrovex Capital, LLC financial advisor to ensure that any contemplated transaction in any securities or investment strategy aligns with your overall investment goals, objectives, and tolerance for risk. Additional information about Macrovex Capital, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD #300692. Macrovex Capital, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice