Market Recap
2026 is off to an interesting start. However, if you’re only paying attention to U.S equity indices you may be missing some important developments.
In the U.S., the S&P 500 and Nasdaq are off to a choppy start, finishing January up 1.17% and 0.97%, respectively. Market breadth and intra-index correlation remain weak. This isn’t inherently bearish or bullish, it’s just a reflection of the continued concentration around AI and tech.
Meanwhile, international and emerging equity markets continued to outperform the U.S., gaining 3.81% and 5.09% (EFA and EEM ETFs).
What We’re Watching
Since 2020, we’ve discussed the potential for a major regime shift. For several years evidence has accumulated slowly, suggesting that we may be on the right track. More recently the pace has picked up with macro and political forces beginning to align.
The U.S. dollar is sitting on a critical long-term trend line, emerging and international equities are outperforming U.S. stocks, and commodities (including metals) are breaking out. At the same time, interest rate and inflation volatility remain elevated, while political uncertainty continues to escalate.
These developments are connected, and the important takeaway is that these forces tend to broaden opportunity sets rather than concentrate them. They also make risk management, a properly diversified portfolio, and the ability to actively manage exposure much more important.
For long-term investors, the most effective trade over the past 15-20 years was simply long U.S. technology. Any attempt to manage risk, diversify, or actively trade was punished.
That environment is changing.
Chart(s) of the Month
The DXY, which measures the U.S. Dollar against a basket of six major foreign currencies, is sitting on a 14-year trend line. A sustained breakdown likely supports the bullish commodity and emerging markets outlook. Additionally, a weaker dollar is generally positive for U.S. exports but often coincides with greater volatility across capital markets.
Next, we have two related charts. The first chart shows the cycles of U.S. and international equity market performance going all the way back to 1975 – cycles typically last 10-15 years. Also overlayed on the chart is the U.S. Dollar index so you can see how the two are correlated.
The final chart tells a similar story. This is a ratio chart of EEM (emerging markets ETF) against the S&P 500. When it’s rising, emerging markets are outperforming the S&P 500, and vice versa. I’ve made some notes on the chart as well. A weaker dollar and strong commodity environment have historically been supportive for emerging markets, many of which are commodity producers and dollar-denominated borrowers.
While the majority of investors are focused on AI, a potential long-term regime shift may be unfolding under the surface – the kind that only comes around every 20-40 years. Only time will tell.
