AI continued to be a hot topic in January and its impact on economic and market activity is pervasive. But the real story is the crazy action in precious metals. With two trading days left in January gold was up more than 25% from the end of 2025 and silver was up nearly 63% before crashing at month end, leaving gold and silver up 13% and 19%, respectively for the month[1]. While there are legitimate fundamental reasons supporting precious metals, including undersupply in silver and central bank buying of gold, the action in January certainly appeared to be a speculative frenzy with very high retail trading activity. The catalyst for the sell-off appears to be President Trump’s appointment of Kevin Warsh as the next Federal Reserve Chairman. As was broadly expected, the Federal Reserve Board voted to maintain the Fed Funds rate at 3.50% - 3.75% at their January 28 meeting.
The President has repeatedly called for lower interest rates, yet the market’s assessment of Warsh’s historical record is that he is more of a Hawk than a Dove. It is probably more accurate to say that he is a “sound money” guy who is more interested in focusing on the real economy and less inclined to use monetary policy as a tool to intervene in asset markets. In the long run this is likely a good thing, but in the short term it could prove disruptive to the status quo. The damage was mostly confined to the metals complex. Stocks had a comparatively muted reaction, selling off a bit but nothing unusual. Bonds barely budged and the US dollar rallied almost 1% on the news but the greenback still lost -2% for the month[1]. All of which seems consistent with precious metals exhibiting mania-like behavior in the short run.
The US 10-year treasury note yield inched up a few basis points in January to 4.24%[1]. Though it dipped to 4.01% in the interim, it is basically where it traded last summer[1]. The Bloomberg Catholic Values US Aggregate Bond Index returned 0.11% and the Bloomberg Catholic Values US 1-3Y Gov’t/Credit Index returned 0.23% compared to -0.09% for the Bloomberg US Treasury Total Return Index[1]. Corporate spreads tightened further and trade at the lowest level in decades[1]. Market sentiment reflects a belief that tariff-driven inflation is unlikely to materialize to a significant degree, and participants seem largely unconcerned with the Supreme Court decision regardless of which way it is decided.
On the topic of inflation, the December CPI came in as expected at 0.3% MoM with Core CPI a touch light relative to expectations at 0.2% MoM and 2.6% YoY[1]. Conversely, on January 30th the December Core PPI Index came in a bit hot at 3.3% YoY vs 2.9% expected and 3.0% in November[1]. The ISM Prices Paid Indexes for December were down slightly relative to expectations for both manufacturing and services[1]. The Core PCE Price Index for the third quarter came in at 2.9% along with an upwardly revised QoQ GDP growth of 4.4%[1]. Ignoring month-to-month gyrations, inflation has been generally stable over the past year, printing in the 2.5% to 3% range[1].
The labor market has also remained stable. Initial jobless claims continue to hover above the 200k line with the unemployment rate dropping -0.2% in December to 4.4%[1]. Nonfarm payrolls were up 70k in December and average hourly earnings were 3.8% YoY[1]. While hardly robust, the labor market continues to support consumer spending, which rose 0.5% MoM in November with retail sales showing a similar gain of 0.4%[1]. The one fly in the ointment is consumer confidence. The Conference Board Consumer Confidence Index for January printed at 84.5 versus 91 expected and a revised 94.2 in December[1]. The Expectations component came in at 65.1, down from 74.6 in December[1]. These numbers highlight an apparent disconnect between what consumers are saying in survey versus what they are doing.
Equities finished the month with a positive return, led by non-US stocks, value and small caps. The Bloomberg World ex-US Catholic Values Index registered a total return of 5.87% in January, well ahead of the Bloomberg 1000 Catholic Values Index total return of 1.21%[1]. Value took the baton from growth, with Bloomberg 1000 Value Catholic Values Index up 6.43% compared to the Bloomberg 1000 Growth Catholic Values Index which declined by -0.42%[1]. The weak performance of the growth index was chiefly driven by a pronounced decline in software stocks, most notably Microsoft, which fell -11% and represents half the weight in the group[1]. A handful of software stocks suffered steep drops as concerns mounted about their ability to monetize their investment given significant spending as well as the threat to their existing business posed by AI’s capabilities. For now, semiconductors, which are the building blocks, are some of the biggest beneficiaries.
As of February 2nd, the January ISM Manufacturing Index jumped back above 50 to 52.6 48.5 and the S&P Global US Manufacturing PMI came in higher than the survey and was up from last month[1]. We are still catching up with data impacted by last fall’s government shutdown, but the emerging picture is one of an economy that continues to advance at a solid clip. Home affordability remains a major issue, however, especially for much of the younger electorate. And, despite favorable aggregate consumer spending data, many at the lower end of the income scale, who do not benefit from the wealth effect conferred by ownings stocks, continue to struggle. Investors entered the new year with a good deal of optimism regarding the ability of earnings growth to keep supporting the bull market. Though it is still early, earnings season looks encouraging on that front so far.
[1] Source: Bloomberg