The Fed, The Feds, and Market Rotation
This Week in the Markets
Just when you thought markets had seen it all, the Department of Justice decided to open a criminal investigation into Federal Reserve Chair Jerome Powell. Yes, you read that right—criminal investigation into the head of our central bank. Markets reacted about as well as you'd expect on Monday, with the S&P 500 plunging nearly 500 points at session lows before staging an impressive yet typical comeback.
On Sunday evening, Powell released an extraordinary video statement revealing that the Justice Department had served the Fed with grand jury subpoenas. The ostensible reason? Congressional testimony about a headquarters renovation. But Powell wasn't having it, calling this a "pretext" and declaring the real issue was the Fed "setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President."
The political drama aside, the economic data this week actually painted a pretty encouraging picture. Tuesday's inflation report showed core CPI (that's the measure that strips out volatile food and energy prices) running at 2.6% annually—the slowest pace since March 2021. That's moving in the right direction toward the Fed's 2% target, even if we're not quite there yet. Of course, that's assuming you believe the data. Much has been written about CPI being persistently understated and there are many reasons why our institutions would do this. Perhaps more on that in another article.
The week's most bullish surprise came Thursday when initial jobless claims dropped to just 198,000—well below expectations and the lowest reading since November. Translation: the job market remains remarkably resilient despite higher interest rates, and American workers continue to enjoy solid employment security for now.
Meanwhile, a fascinating rotation is happening beneath the surface. Small-cap stocks—those smaller companies tracked by the Russell 2000 index—have now outperformed the S&P 500 for 11 consecutive trading sessions. That's the longest streak since June 2008. Think of it as investors finally diversifying beyond the "Magnificent Seven" mega-cap tech stocks that dominated the last two years.
Bank earnings kicked off strong, with Goldman Sachs (GS) posting record equities trading revenue of $4.31 billion—the best quarter ever by any Wall Street bank.
And speaking of things surging: gold hit new all-time highs above $4,600 per ounce, while silver continued its nearly vertical climb, gaining 10-11% for the week and is now up 25% just 18 days into the year. When investors get nervous about institutional stability, they tend to reach for the shiny stuff.
Other Headlines
TSMC Announces $52-56 Billion Capex Plan — Taiwan Semiconductor (TSMC) delivered record Q4 profits (up 35%) and unveiled the largest semiconductor capital expenditure plan ever, signaling sustained AI chip demand through 2026 and beyond.
Trump Proposes 10% Credit Card Interest Rate Cap — The President called for temporarily capping credit card rates at 10%, down from the current average of 23.79%. Bank stocks tumbled given such a drop would cut into their interest income on the $1.23 trillion in consumer credit card debt.
Massive Verizon Outage Leaves Millions in "SOS Mode" — A software glitch knocked out voice, text, and data services for Verizon (VZ) customers across major U.S. cities for nearly 12 hours on January 14. The outage triggered emergency alerts in NYC and Washington D.C., with Downdetector logging 2.3 million complaints. Verizon is offering $20 credits to affected customers.
Trump Announces 25% Tariffs on Countries Trading with Iran — The President threatened secondary sanctions on any nation doing business with Tehran, a move that could escalate tensions with China (Iran's largest oil customer) and pushed crude prices higher for the week.
Prediction Markets Boom Under Trump 2.0 — Apps like Polymarket and Kalshi are thriving as traders gamblers bet on everything from deportation numbers to policy outcomes. A community of young, predominantly male traders are quitting their jobs to pursue prediction market gambling full-time.
Looking Ahead
Monday, January 20 — Markets are closed for Martin Luther King Jr. Day.
Tuesday, January 21 — Netflix (NFLX) reports earnings after the close, and this one matters. Streaming has been a rare bright spot in consumer spending, and Netflix's subscriber numbers will signal whether that trend continues. United Airlines (UAL) and 3M (MMM) report before the open.
Wednesday, January 22 — Housing data takes center stage with Housing Starts and Building Permits at 8:30 AM. Given elevated mortgage rates, any signs of life in the housing market would be notable. Procter & Gamble (PG) and Johnson & Johnson (JNJ) earnings will offer insight into consumer staples spending.
Thursday, January 23 — Circle this date: the Bank of Japan announces its interest rate decision, with markets pricing a possible hike to 0.75%. If the BOJ surprises with a big hike, expect ripples through global currency and bond markets. Intel (INTC) reports after the close—a key read on the semiconductor sector beyond the AI darlings.
Friday, January 24 — The week closes with the final Michigan Consumer Sentiment reading. Watch how consumers are feeling about their finances and inflation expectations. American Express (AXP) earnings will reveal how the affluent consumer is holding up.
The Big Picture: The Fed enters its blackout period ahead of the January 27-28 FOMC meeting, so no Fed speakers to move markets. Expect attention to focus squarely on earnings and any developments in the Powell investigation. With core inflation at 2.6% and jobless claims strong, the Fed is almost certainly holding rates steady—the only question is what they say about the path forward.
The Bottom Line
Beneath the headline drama, this was actually a healthy week for diversified investors. The market showed it can continue absorbing political shocks, economic data remained solid, and the rotation into neglected corners of the market continued. Sometimes the most important market moves aren't the ones that make the front page. However, caution should be exercised. Despite the continued move higher in markets, political and economic risks continue to pile up.
Have a blessed week.
