Markets Digesting Warsh As Next Fed Chair
Trump’s nomination of Kevin Warsh to be the next Fed Chair set off a cascade of market jitters on Friday. Whether such news is worthy of the volatility spike markets experienced in many areas is up for debate (after all, Warsh has been a leading candidate for some time, nothing new here) or maybe the froth that built up in the precious metals / commodities markets just needed an excuse to punish the late chasers. All that said, equity markets wobbled with the small-caps taking a hit from their inflated levels and the Nasdaq suffering its third consecutive week of losses – the high-beta names have come under the most downward pressure of late. The bond market sold off a bit into a steepener trade (interest rates further out on the curve rose more than short-term rates). The U.S. dollar popped sharply from the lows, and of course, we had that epic reversion in the precious metals market.
As clients and loyal readers know, we’ve been in the gold/commodity trade for many years now, but never had we experienced a levitation like what occurred over the prior three weeks leading into Friday. While our work suggests little has changed in the secular bull market story, it can be argued that the risk of Fed independence being eroded has diminished. However, price action in the space became too wild and ripe for a steep correction. And boy did we get it, as silver plunged more than -25%, in the sharpest decline since March 1980. The price of silver in the futures market reached as high as $121.78 and traded down to $71.20 at this morning's low. Keep in mind, silver is back to where it was three weeks ago and is still up 12% for the year. The chart below illustrates how steep and rapid the moves – both up and down – were for silver. Those latecomers who chased the move once it broke above $75/oz deserved to be humbled.
The price action in the gold market was very similar to that of silver. Last Friday, the front-month gold futures got slammed by -11% to $4,713.90 a troy ounce after moving above $5,500/oz on Thursday. This was the steepest one-day decline in the yellow metal since January 1980, just after gold looked like it wanted to make a further parabolic run to $6,000 per ounce. This is the chart of gold last Thursday when no one cared about how parabolic the upside move was getting – its monthly RSI hit 96 (the highest I’ve ever seen in this space). For additional context, consider that gold started overshooting the big trend channel only 7 sessions ago, when it traded at $4800. You have to be brave, crazy, or dumb to chase it at such extremes. It forced my hand to liquidate the exposure we added in mid-December because it had moved to the upside so aggressively.
What’s just as striking is how quickly and sharply the unwind occurred, with gold's RSI falling from 91 to 46 in no time. We are now at the most oversold levels since the melt-up started in late August, with gold approaching the steep trend line that’s been in place since September. We already tested the 50-day moving average during the mini flash move on Sunday night. The $4,600 (±$50) level is where gold needs to hold and stabilize if this move is to remain constructive.
Zooming out, gold is back to mid-January levels, and leaves me wondering if and where positioning gets properly reset: too many momentum trades turned into outright FOMO, with little thought given to downside risk management. Consolidating for a couple of days or weeks around the $4,500 – $4,600 level would be a constructive sign.
The lesson we learned from the past few days in the precious metals space is that volatility can move in both directions. It could well be the case that the Trump choice of Kevin Warsh has shaved concerns over the next Fed Chair being under the thumb of President Trump, and that monetary policy independence has been preserved (though remember that Warsh does seem bent on the Treasury having more control over balance sheet issues), but the plain fact of the matter is that there was way too much froth in the price of both metals. Reversing the speculative / leveraged binge and overcrowded trade is actually a very healthy development (I mean, come on…at the peak, silver was up +250% on a YoY basis and had surged +63% in January alone – it was starting to behave like a meme stock), and the reality is that most of the underpinnings for the secular bull market, especially in gold, remain intact. Before long, we will very likely be back in adding to the positions we’ve trimmed during January’s epic rise in bullion and other commodities.
The same holds true for other base metals, such as copper and aluminum, and for the energy sector, including oil and uranium. The whole commodities complex and debasement thesis received a necessary gut check. As painful as the correction has been in the commodity complex over the past two days, many of these areas are still high up on the performance leader board through the first month of the year, but just got too far ahead of themselves.
Speaking of what’s been working this year, the year is off to a strong start for global / U.S. equities:
Foreign stocks as measured by the All-Cap World Ex U.S. Index rose +5.4 percent in January, besting the S&P 500’s +1.4% gain. A weaker greenback was a tailwind for international dollar-based equity returns, but it does not entirely explain their outperformance.
MSCI Europe, Japan, and Emerging Markets all outperformed the S&P 500, up +4.6, +6.2, and +8.0 pct, respectively.
U.S. small and mid-cap stocks, up +4.0 to +5.7 pct, outperformed large caps.
Across both U.S. large and small caps, cyclical groups like Energy, Materials, and Industrials were leadership groups, and Consumer Staples saw a healthy bounce back from tax loss selling in Q4 2025.
U.S. Large cap Tech posted a small loss in January (-0.1 pct), and US Big Tech neither added nor subtracted from the S&P 500’s monthly return.
Our work continues to suggest that a regime shift is underway, with the U.S. exceptionalism trade (U.S. markets outperforming others) coming under pressure, but that doesn’t mean that U.S. equities can’t perform well, also. The global economic backdrop of broadening growth, fiscal support, tame inflation, stable interest rates, strong corporate profits, and A.I. innovation offsetting cost pressures from a shift away from globalization towards nationalism is constructive for risk assets. I think investors should lean into this view while remaining mindful that valuations are an obstacle to above-average returns, and a significant risk if the global economy experiences turbulence. Another headwind for investors to be mindful of is that we’re well past the peak of global monetary policy accommodation, as shown in the chart below from Michael Hartnett, which measures the rate-of-change slowdown in global central bank interest rate cuts.
With the labor market holding steady, inflation stable, U.S. economic growth firm, and corporate earnings continuing to delivery, it’s hard to pivot to the bear camp (although I have some thoughts on this below). As for earnings, Q4 results are delivering on expectations, with YoY growth tracking at +11%. This will be the fifth consecutive quarter of double-digit EPS growth (see FactSet chart below). We have 130 companies reporting this week, with Google (Wednesday) and Amazon (Thursday) wrapping up the big tech companies, and by week's end, we’ll have 75% of the S&P 500 earnings in the books. While the Tech sector's stock performance has been underwhelming, Tech + Mag7 earnings are tracking +24% YoY in Q4, up from the projected 20% heading into reporting season.
Humor me as I share a couple of thoughts on the political landscape, because I think the outcome of the upcoming mid-term elections is going to matter for markets and policy. Most investors don’t appear to be paying much attention to it yet, but I expect that to change. This weekend's results for the Texas State Senate District 9, where Democrat Taylor Rehmet defeated Republican Leigh Wambsganss, is noteworthy in that Rehmet won by a +14-point margin in what has traditionally been a solidly red district that includes part of Fort Worth (President Trump won the district by a +17 margin in 2024). This represented a massive 31-point swing from the November 2024 election result, and is yet another reminder that the GOP is unlikely to maintain control over both Houses of Congress come November.
Polymarket/Kalshi (betting market odds makers) indicate that the Democrats' odds of overtaking the House are 77%. Not a big surprise here as it aligns with the historical data that show the party of the sitting President loses seats in the House during midterm elections. The Senate map still favors the GOP retaining control, but those odds have been softening over the past six months. At stake, of course, are the fiscal ambitions of the President because the future beyond 2026 will be one of gridlock, and that is really important when you consider that in the past five years, accumulated budget deficits have totaled $13 trillion, which supported a +$9 trillion expansion in nominal GDP. Look, both parties are guilty of fiscal malfeasance, and I’m under no illusion that the fiscal gravy train is set to end, but a speed bump (gridlock) that thwarts its progress is worthy of concern. I submit that there is no “economic resilience” without massive 5% deficit-to-GDP ratios year in and year out.
Which brings me to some closing thoughts, and this is just me talking out loud here, but I know I’m not the only one noticing that even with all the economic cheerleading about the ‘greatest economy ever from President Trump’ – GDP prints have been strong, corporate earnings are up double digits for five straight quarters, inflation is data tame, global growth is accelerating and broadening, and the labor market is holding steady – yet the S&P 500 is almost unchanged since the end of October (+1.45%). It’s reminiscent of what transpired in Q4 of 2024 into the Liberation Day announcement in April 2025.
It’s a similar picture for the Nasdaq, which is still below its October 2025 all-time high.
Come on, Corey, it sounds like you’re scraping the bottom of the barrel for bearish material. That could be the case, but I can’t get the words of famed trader Bruce Kovner from the book Market Wizards out of my head when analyzing the current setup:
“What I am really looking for is a consensus that the market is not confirming.”
Geopolitics and ‘Trump Derangement Syndrome’ aside, the consensus narrative is widespread bullishness on both economic growth and the stock market. Investor positioning and sentiment are at some of their most bullish levels ever recorded. The S&P 500 sniffed 7,000 for a couple of minutes last Wednesday, and President Trump didn’t hesitate to inform everyone.
But, I’ll say again, the S&P 500 and Nasdaq are little changed from where they were three months ago. Maybe we're going through another cycle of capital rotation, with money moving out of the highly concentrated MegaCap Tech space into small- and mid-cap equities, international equities, and commodities, keeping the major averages up while capital reallocates under the surface. That could be it, and it's definitely what we’re seeing play out from the performance numbers. But I’d be remiss if I didn’t share the hint of skepticism and uneasiness I have with my bullish lean at the moment. I can’t put my finger on it, I can’t quantify it, nor do the fundamental drivers that matter to our work suggest something is amiss. But that was also the case in the precious metals space up until a couple of trading days ago. Keep silver aside, but to see gold – an asset that checked many of the boxes on why investors should own it – face plant nearly 17% (a $39 trillion dollar asset class crash down to $31 trillion) over two days serves as a warning signal to me.
Bottom line, we maintain a constructive view, but we’re going through the portfolio, pruning out dead weight and ideas that aren’t working. Focusing instead on making sure the allocation and exposures to certain themes are properly sized. Our broader view remains that, in a world of shifting geopolitics and evolving financial infrastructure, the growth and resilience of ex. U.S. economies (particularly in Asia as well as in parts of Europe and Emerging Markets) should support another year of relative outperformance outside the United States. A weaker U.S. dollar and persistent policy volatility look set to remain the defining themes. The first weeks of the year have already been a strong reminder, as hedging demand against the reserve currency has intensified. In such an environment, diversification is paramount and vital for risk management, which includes being patient and minimizing unforced errors. Investors continue to overlook the value of high-quality bonds offering secure mid-single-digit yields. Being able to sit idly by in stable instruments while clipping a healthy coupon and waiting for the right opportunity to pounce is extremely valuable.
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