Optimistic Uncertainty
There is an old saying that goes something like – So goes January; So goes the year. If this adage holds true in 2026, the 1.7% return on the S&P 500 Index in January is giving us pretty good odds of another positive equity market this year.
Are there any headwinds? You might say “You betcha” if you look at the very high flying Tech sector, particularly those mega cap stocks driven by the Artificial Intelligence boon. These eight to ten leading stocks recently pulled back, and may continue to do so, but the rest of the 490 stocks, as well as small and mid cap companies are benefitting from renewed interest in their lower p/e’s and attractive dividends.
There is endless speculation on the effects of tariffs this year. We finally see some tariff related costs and inflation being passed on to the consumer and the Federal Reserve will likely take a “wait and see” approach on rate reductions until the extent of tariff effects are clearer. The Supreme Court’s recent ruling that invalidates as unconstitutional most of the Reciprocal Tariffs from April of last year hasn’t removed the uncertainty surrounding tariffs. Newly imposed 15% tariffs have now been ordered but under a different section. And so, the headwind of uncertainty continues.
The higher income part of our consumer economy keeps spending, and this is a positive indicator for the continued expectation of positive GDP for 2026. Carl Weinberg recently suggested on Bloomberg that we should expect more disrupting events, unpredictability and uncertainty. He suggests that these conditions may be good for markets. While uncomfortable for many investors, volatility often brings opportunity.
The government shutdowns have hampered the production of good employment data, and we should not expect to get what might be called “clean data” until later this year. Until then, economists and investment managers will rely on anecdotal and survey data to give us a sense of where labor (the workers on whom our economy depends) is going. The latest JOLTS (Job Openings and Labor Turnover) report for December suggests we are still in a “Low hire, Low fire” environment, but the ISM Manufacturing and Services PMIs rose to a level that signifies a pretty good expansion is underway. So, I think we can say we have “some good news with some less than good news” outlook for the next several months.
Our goal here at Erickson is to smooth out some effects of the volatility we expect to experience. Our investment thesis has always been to use Diversification as a way to be invested with some measure of risk mitigation for both equities and bonds. This year we will maintain our allocation to investments outside of the US. We will also remain committed to a Value style of investment management – invest in relatively lower p/e positions, look for dividends, trade infrequently and allow growth to happen over time.