Diversification is Back
By Crest Capital Advisors on January 19, 2026
Dow: (0.29%) to 49,359.33
S&P 500: (0.38%) to 6,940.01
Nasdaq: (0.66%) to 23,515.39
Russell 2000: 2.04% to 2,677.74
Bitcoin: 95,610
10 Year Yield: 4.22%
Outperformers: Real Estate 4.07%, Consumer Staples 4.84%, Industrials 3.02%, Energy 2.42%, Utilities 2.10%
Underperformers: Financials (2.33%), Consumer Discretionary (1.99%), Communication Svcs (1.54%), Healthcare (1.06%)
US equities were mostly lower this week, though breadth was positive and the broadening out trend of 2026 continued, with equal-weight S&P outperforming the cap-weighted index by over 100 bp. The small-cap Russell 2000 had another strong week, balanced by weakness in Big Tech.
The market ended the week with no clear directional catalyst, resorting to listening to the constant high winds of geopolitics. The White House made an affordability push by pressuring the big banks to cap credit card interest rates and took aim at the Fed which raised independence concerns. We found most of this to all be a sideshow since Powell’s term ends in a few months and pushing through more regulations on banks is something for which congress has very little appetite. Overseas tensions remained elevated with some shift in focus to Iran (which drove big 5-day rally in oil through Wednesday), where protests against the government continued to heat up, causing the regime to shut down all communications and push back using military force. Oil, being a key inflation input, has been front and center with renewed US drilling coming online, Venezuela oil potentially hitting the market, balanced by increasing sanctions on Russia and Iran. CMD thinks a 2026 story could be a massive amount of supply coming on market and oil price declines with settlements in Russia/Ukraine, and Venezuela and Iran under new leadership.
Back to the US equity market we are seeing larger moves underneath the surface. While not necessarily reflected in the broader market averages, an underlying market dynamic we are watching is the relentless selling of the software (SaaS) sector in the new year. It’s funny to us how markets can question the overall viability of AI on the one hand…fearing a bubble…and on the other hand completely decimate a sector based on fears that AI will entirely displace it. And hence, our meme of the week showing the struggle is real for the trading algos driving these trends. Software is simultaneously alive (AI bubble) and dead (AI takeover) at the same time.
Politics & Markets
In our 30-plus-year careers of watching markets and how politics impacts them, one of the most striking developments is how the first and second years of a presidency differ from a governing perspective. Presidents use their first year, when their political capital is the highest, to enact economic stimulus measures to run the economy hot into the midterm election year. But in year two, with the economic cushion at their back and most presidents underwater with voters, presidents become more populist. This is one reason that midterm election years have larger intra-year equity market drawdowns than the other three years in the presidential cycle. And it’s also a major reason the S&P 500 rebounds strongly following the election, with the S&P 500 not declining in the 12 months following a midterm election since 1938.
This past week and weekend confirm the historical trend is in place. Just since the stock market closed last Friday, Trump has proposed capping credit card rates at 10% and subpoenaed the Federal Reserve Chairman for giving false testimony to Congress last June. This comes on top of arresting the leader of Venezuela, urging the GSEs to expand their retained portfolios (a form of back-door QE of sorts) for the first time since the financial crisis, attempting to ban institutional ownership of single-family homes, and preparing Mexico, Greenland, Iran, and Cuba for possible US military action. Electricity price cap proposals were unveiled on Friday, capping a dizzying display of volatile policy. Indeed, it would appear that shock-and awe economic policy will dominate 2026, so the moves in the equity market will not be linear. In our view, this is going to be a grind-it-out year, though we are pleasantly surprised at how well all of the above has been largely shrugged off (unless you are concentrated in the targeted groups) by the broader market averages.
We also find the following chart of interest. It overlays the direction of the US Dollar for the first 2 year’s of Trump’s respective presidencies. As you can see, we are almost exactly on track with how things played out in 2017-18.
Is it Finally Time?
Speaking of a falling dollar, the historical relationship matters because emerging markets have spent nearly two decades testing investor patience. Despite consistently higher economic growth rates, EM equities largely delivered risk without reward, while US large-cap stocks compounded relentlessly. That disconnect made emerging markets an increasingly easy allocation to avoid.
Yet dollar cycles have always played an outsized role in determining whether that growth translates into equity returns. When the dollar weakens, emerging markets have historically been among the strongest performers, as capital flows broaden, financial conditions ease, and earnings translate more favorably back into local markets. More broadly, weaker dollar environments tend to be supportive of risk assets overall.
With EM equities now approaching, and in some cases exceeding, their prior cycle highs (see 20-year price chart below), the combination of a softening dollar and improving relative momentum raises a question investors have not seriously asked in years. If the dollar’s decline persists in either magnitude or duration, the long ignored case for international equity diversification may finally have a macro backdrop capable of sustaining it. And emerging markets may just lead it.
Rotation Theme Still Has Legs
Despite the recent uptick in value stocks as markets have rotated away from technology over the past few months…and even more pronounced in 2026…the valuation gap between the Russell 3000 Value and Growth indexes has not meaningfully narrowed. In the post-COVID environment, value has remained quite inexpensive relative to growth, with the relationship sitting roughly one standard deviation below its long-term average. (But also holding at those levels for many years now)
If we are truly seeing a sustained shift in style performance, we would expect to see quite a bit more in terms of relative performance just to bring the relationship back to “average”.
And another relationship that remains at an extreme is the valuation of small caps relative to large caps. One of the longstanding arguments for owning small-cap stocks has been this valuation gap, which continues to persist and remains well below the one–standard deviation level.
That said, valuation is not a reliable timing tool (as evidenced by the extended years of lagged performance here as well). It’s also worth noting that small caps have historically performed best coming out of a recession, yet traditional business cycles have largely been dampened by policymakers so we haven’t had one in a long, long time.
Private Markets Update
Private Equity dealmaking in the US hit full stride in 2025, shaking off some early-year hiccups to notch the second-highest annual deal value on record! But the rebound was overwhelmingly driven by the comeback of plus-size transactions. PE firms recorded more than 9,000 deals last year. The total value of those transactions reached $1.2 trillion, making 2025 only the second year in which funding surpassed the $1 trillion mark, according to our latest US PE Breakdown.
That figure was just shy of the $1.3 trillion industry record set in 2021. Mega-deals, defined as those worth $1 billion or more, were the primary driver of the growth. PE firms struck nearly $570 billion worth of such transactions during the year, accounting for about 52% of total deal value, the highest share ever.
Food for Thought
Are your perceptions being influenced by the media’s different ways of framing market news depending on which political party occupies the White House?
See below for exhibit A.
Economic Funnies
Crazy Stats of the Week
- Silver just punched through $90 per ounce this week, hitting a fresh all-time high, a stunning extension of its already massive rally which has seen the metal trade up ~200% year-over-year.
- Since the bull market began in October 2022, the S&P 500 has delivered over a 100% total return (including dividends) through 2025.
Quote of the Week
“While any number of risks continue, we are bullish on the US economy in 2026.”
-Brian Moynihan, Bank of America CEO
Calendar of Events to Watch for the Week of January 19th
US corporate earnings reports will start to ramp up significantly next week as we move on from finance/banking to notable prints in tech/healthcare and energy names to call out a few key sectors investors will be watching. We’re also expecting several IPOs of note with digital asset infrastructure systems name, BitGo coming to market on Thursday with an ~$190m raise. Connected construction systems name, Equipment-Share.com is scheduled for a Friday IPO with an ~$750m raise. We’re taking note of rising optimism around a continued resurgence of new supply to a market that has seen the number of public companies in decline for many years now.
US Economic Data readings will start slow with the holiday shortened week, but ramp into the end of the week with key reports on inflation (PCE report) and Services and Manufacturing on Friday.
Monday 1/19 – US Markets (and Crest Capital) will be closed in observance of the Martin Luther King, Jr. Holiday.
Tuesday 1/20 – No major US Economic Reports due out today. Expect markets to be playing catch-up based on Monday’s overseas overall risk sentiment.
Wednesday 1/21 – October Construction Spending is expected to post a modest 0.1% monthly uptick. December Pending Home Sales are expected to be flat at 0%, down from November’s 3.3% pace.
Thursday 1/22 – The main event of the week will be the arrival of (very late) the November Personal Consumption Expenditure (PCE) report. Economists are forecasting a 2.8% year-over-year increase for the Core (Ex-Food/Energy) and a 0.2% monthly pace.
Friday 1/23 – The January (preliminary) S&P Global PMI’s for Services and Manufacturing are expected to show expansion at 53.0 and 51.8 respectively.
Source: MarketWatch / FactSet (January 2026)
