Investor Jitters Ease After Yesterday’s Market Debacle

Big “events” day ahead with the Supreme Court hearing on the Cook file and the Trump address in Davos.

Key Takeaways

• TACO Yet to Be Found: Nobody is going to be talking about the fabled “January effect” as they were in the first week of the year, now that the S&P 500 is down -0.7% so far in 2026. The TACO trade did not emerge yesterday, but the bulls are awaiting signs that the President is bluffing and that cooler heads at the White House and core Europe will prevail.

• Bonds Fail as Shelter: Part of the problem is that there has been no flight-to-quality to bonds, so another challenge is that the relative-value trade back into equities is not working this time. President Trump’s chaotic foreign policy and the Japanese government and central bank’s tolerance for inflation have scared fixed-income investors globally from taking on duration risk.

• Risk Without Reward: On a CAPE multiple basis and with the 30-year real bond yield at 2.6%, the equity risk premium (ERP) is officially negative. Not the best risk-reward proposition I have seen in my lifetime.