There’s been a fairly positive start to the New Year as far as equities are concerned.
The first week of January saw the Dow Jones Industrial Average and the S&P 500 trade at fresh all-time highs.
Both the tech-heavy NASDAQ and the small cap Russell 2000 continue to hover a touch shy of their own record levels, hit back in late October and mid-December, respectively.
Even the European laggards have come back to life. The German DAX has just surged above 25,000 for the first time ever.
Meanwhile, the decidedly old school, tech-less FTSE 100 broke above 10,000 on the first trading session of 2026 and has, so far, managed to hold above here.
It’s a similar picture across Asian Pacific markets, with Japan’s Nikkei, South Korea’s Kospi, the Shanghai Composite, Hong Kong Hang Seng and India’s Nifty 50 all at or near all-time highs. Investors have been branching out.
Some of the heat has come out of the tech leaders and those other giant multinationals that have been responsible for the near-relentless rally since October 2022.
But rather than signalling that it was time to cash out of equities, investors have reinvested their profits from tech into hitherto ignored, and therefore undervalued, corners of global stock markets.
Investors have broadened out their exposure and, as a result, equity markets are looking healthier and potentially less risky than they have been for some time.
There’s no clearer indication of this than the subdued volatility measures across the major US indices.
The VIX, which measures forward volatility on the S&P 500, has drifted down steadily from its April peak, back towards lows seen twelve months ago.
This means that even with the broadest measure of US stock market health at all-time highs, investors see no need to pay up for downside insurance through put options, at least for the next couple of months.
The same is true of NASDAQ volatility. It doesn’t really matter where you look (within reason) – every dip has been bought, and risk appetite is high. What’s not to like?
Well, just because there’s no volatility today doesn’t mean there won’t be tomorrow. Yet there are some obvious tailwinds for stocks.
The US Federal Reserve has just cut interest rates to their lowest levels in over three years, while signalling more cuts to come this year as well.
Inflation is thought to have peaked and a significant number of analysts expect it now to pull back towards the Fed’s 2% target. It’s already there in the Eurozone.
On the flip side, the US labour market has become a concern for the Fed. Unemployment has ticked up a touch but continues to be low by historical standards.
Yet Non-Farm Payrolls, which will be updated on Friday 9th January, have been all over the place.
There were two dreadful readings last summer, while the data since then has told us nothing, thanks to being scrambled by the US government shutdown in October.
Do investors care? Not much. A solid payroll release is viewed as bullish as it indicates strength across the US economy. A poor number is bullish as it boosts the probabilities of an early rate cut.
But it’s always troubling when everyone is on the same side of the boat, even when there’s nothing obvious on the horizon.
Trouble can sometimes come from an unlikely source, so it’s probably a good time to prepare for it.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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