Markets were mixed last week.  The MSCI EAFE Index rose almost 1.5% while the Dow Jones Industrial Average and S&P 500 were both down less than 0.5%, and the NASDAQ fell just over 0.5%.  The Cboe Volatility Index jumped almost 10% and is up to 15.9 which is just slightly below its long term average.  Financial stocks were the biggest losers with a few banks missing on earnings (more to come).  Bond prices were slightly down in aggregate.  The yield curve has remained steep, but we’ve seen both the 2 year Treasury and the 10 year Treasury with higher yields while the 30 year Treasury has remained flat.  Broad commodities were up 1.4% with oil better by 0.7% and gold up 2.2%.  The U.S. Dollar was stronger almost across the board as it continues to reverse the price action from 2025.  It is a lighter week for data releases, but we’ll still get Construction Spending, Pending Home Sales, 2^nd revision to 3^rd Quarter GDP, and the Fed’s preferred inflation measure, PCE.  It looks like tariffs will be moving markets more than earnings and inflation for now.

 Inflation Flat in December

 The Consumer Price Index (CPI) rose 0.3% in December matching expectations.  CPI is up 2.7% in the past year.  Core CPI, excluding food and energy, was up 0.2% for the month and 2.6% higher for the last 12 months.  Both Food and Energy were higher with food gaining 0.7% for the month while energy costs were up 0.3%.  We are seeing some improvement with CPI rising 2.7% in 2025 against 2.9% in 2024.  Core CPI was a similar story with core prices up 2.6% for 2025 after rising 3.2% in 2024.  Rents are continuing to give some inflation relief as they rose 0.3% for the month, but are only up 2.2% in the past year.  Looking at Food, we see that diary prices jumped 0.9% with cheese and ice cream prices up around 1.5% monthly.  Citrus fruits jumped over 5.0% while Frozen Vegetables were up 2.8%.  Beef was 1.0% higher for the month and is up over 16% in the past year.  Eggs continue to reverse the pandemic trend as prices fell 8.2% for the month and are down 20% from last year.  Almost all of the increase in energy costs was the impact of natural gas utility prices jumping 4.4% in December.  That cost has risen over 10% in the past year.  Used cars and trucks were down 1.1% while New vehicles were flat.  Both have seen minor changes over the past year.  Computer software and accessories jumped 7.0% monthly and pulled the full year inflation up to 4.4%.  Computer and SmartPhone inflation were both down monthly and annually.  Insurance and Health Care are both pretty stubborn and do not look to be dropping or leveling out at all.  So we see some pockets where moves in individual categories are moving the overall category higher.  Turning to the Producer Price Index (PPI), we see more of the same.  PPI rose 0.2% in November and are up 3.0% from a year ago matching the consensus expectations.  Core PPI was unchanged in November and up 3.0% in the past twelve months.  In PPI, we see energy prices rose 4.6% monthly with food prices unchanged.  This was the largest monthly energy price increase in more than 2 years.  Prices for goods have risen 3.2% in the past year while prices for services are up 2.9%.  Private capital equipment prices rose 0.2% and are up 2.0% annually.  Prices for intermediate processed goods rose 0.6% monthly and 3.6% in the past year.  It should be pointed out that we did see an improvement of 0.4% from a year ago.  November PPI showed the annual change at 3.4%, so for PPI in December to show an annual gain of 3.0% is a big improvement.  I think we’ll continue to see these lumpy months from 2025 fade away and I also think that will move overall inflation.  I think we can see the impact of tariffs in PPI.  Goods prices have risen more than Services prices is our first tip off since the U.S. imports more goods.  I think we can see it directly in intermediate processed goods that are up more than overall PPI inflation.  In fact, in the past 6 months, good prices are up at a 5.1% annual rate.  I’ve mentioned this before, but I think its worth stating again that as we work through 2026, it seem pretty apparent to me that those initial prices shocks from tariffs will fade and inflation should be very close to the Fed’s 2% target by the end of this year.  (Sources: Bureau of Labor Statistics, Consumer Price Indexes – December 2025, U.S. Department of Labor; Bureau of Labor Statistics, Producer Price Indexes – November 2025, U.S. Department of Labor)  

 Earnings Off to a Slow Start

 It is very early in Q4 earnings season to start drawing a lot of conclusions, but we didn’t get off to a great start.  Three banks in particular, Wells Fargo, Citigroup and Regions Financial (I have no opinion on any of these companies, please refer to UBS research for detailed information) all missed expectations which led to no change in expectations for the quarter.  Its not all bad though.  First off, only 7% of the S&P 500 has reported earnings.  Second, we are seeing 79% of those companies beating estimates which is above the 5 and 10 year average.  Another attribute of growth not rising is that there were downward revisions for companies in Energy and Health Care.  Overall, analysts revisions mixed with actual earnings have all sort of cancelled each other out.  So, we started on December 31 with expectations of 8.3% earnings growth and 7.8% revenue growth and we are still at those expected rates one week in.  I think we are seeing the continuation of a trend started in Q3 last year where positive surprises are being rewarded less and negative surprises are being punished more.  So far, companies beating expectations are seeing their stocks lower by 0.4% in the two days prior and after reporting earnings.  That is well below the 5 year average of a 0.9% increase.  Meanwhile, companies that have missed expectations are seeing their prices lower by 4.0% over the two days prior and two days post earnings, and that is well below the 5 year average decline of 2.8%.  Profit margins have remained healthy at 12.8%.  We’ll get another 7% of the S&P 500 reporting this week with 35 companies, including 4 Dow 30 components.  Next week, and that week after will be the normal deluge of earnings where most companies report including most of the major technology companies.  Its hard to draw any definitive conclusions, but I think the trend of less reward and more punishment is telling me that this is a ‘show me’ market.  Despite high valuations, that seems to run counter to the idea that we have a huge bubble.  (Source: Butters, J., Earnings Insight January 16, 2026, FactSet)

  China Trade Surplus Tops $1 Trillion

 China seems to have not felt any pain at all from the U.S. tariff regime against it.  China has fallen to a distant third behind Mexico and Canada in terms of trade with the U.S., but that didn’t stop it from becoming the first economy in the world to hit a trade surplus of $1 trillion.  That might sound good to the central planners in the CCP, but I think we are seeing Chinese weakness with this report.  China’s surplus jumped 6.6% in December and was the largest increase in 3 months.  The IMF projected that the surplus is 3.3% of GDP which is the highest since 2010.  Why wouldn’t that be a good thing?  Its not great for China because exports are higher while imports are flat and Chinese consumer consumption remains tepid.  Further, its currency remains weak, so imports are getting more expensive, and there is still the real estate crash hanging over Chinese consumers, so it doesn’t appear that trend is changing.  Despite all this trade, Chinese consumers are not spending more money which calls in to question to me what profits are being made on this trade.  You won’t see much information about how this trade surplus translates into spendable income.  I think the other issue China faces is in its mix of exports.  There are 8 major categories of Chinese exports: Electronics, Machinery and Appliances, Textiles, Metals, Cars Parts and Transportation, Bedding Furniture Toys and Games, Chemical Products, and Plastics and Rubbers. Those categories account for almost $3 trillion in trade.  Other than the first 2 categories, we see very low margin products.  China has sold many of them at or below cost while attempting to corner these markets particularly in metals, cars, chemicals and plastics.  These products are not necessarily low margin in the rest of the world, but there have been multiple reports on the over 100 car companies in China that are selling cars below cost both in China and Europe.  Is China’s trade surplus just a jobs program?  Its great to sell more than you buy, but to what end?  We don’t see China aggressively paying down debt, in fact China ran a $1.7 trillion deficit last year.  The Dallas Fed estimates that about 17% of all manufacturers in China are ‘zombie’ companies.  The definition of a ‘zombie’ in this case is when EBITDA (earnings before interest, taxes, depreciation and amortization) is less than interest expense.  A more simple way to say it is that you paid more in interest than your company’s profits.  So yes, a $1 trillion surplus is an achievement, but not one that I think any country should strive for.  Especially when that achievement comes without much to show for it.  To me, it looks like the big winners in all this Chinese trade are the countries that China ships products to so they can be rerouted to the U.S.  Indonesia has seen it exports to the U.S. jump around $23 billion in 2025, a nearly one third increase.  Vietnam and Mexico are also seeing a surge of Chinese imports to be eventually sent to the U.S.  Unless and until any of this stimulates consumer growth in China, it appears to me that China will remain a prisoner in the prison it built where it must continue to produce at or below cost to keep workers employed.  A lot of moving around, but not really going anywhere.  (Sources: Kozul-Wright, A., How did China’s trade surpluss hit $1 trillion?, Al Jazeera; Conte, N., Ranked: Countries With the Most Government Debt in 2025, Visual Capitalist; Davis, J.S., Kelly, B., China debt overhang leads to rising share of ‘zombie’ firms, Federal Reserve Bank of Dallas)  

  Positioning Your Account

 It looks like we may see some softness this week as President Trump is rolling out new tariffs on countries in Europe over Greenland.  I think it is hard to know whether to zig or zag until more of this shakes out.  That said, I still think I want to own more stocks, and this might be a dip buying opportunity.  I think GDP growth this year might be double the twenty year average of 1.9%.  It seems to me that rising unemployment would be the only thing that can derail the growth we are seeing.  I don’t think there is much to change for those that are fully invested.  For investors holding cash, I would recommend a dollar cost averaging approach to systematically invest on a monthly basis.  I encourage investors to consider large, U.S. dividend payers, large, U.S. technology companies, small U.S. companies for investors with a greater tolerance for risk, and currencies and commodities for diversification. 

All the best, 

Gary