Market Update: Warsh Nomination, Rates, Shutdown Headlines, and Diversification

Updated for Friday, February 6, 2026

Markets can be like the weather. Hard to predict and wait a minute and it changes. After repeated records in 2026 equity markets are retreating. Declines are always faster than gains and that is what we are seeing. Especially hard hit is crypto which is down 50% year to date and precious metals have had precipitous falls during the past week. Year to date the SP500 turned negative as well. Year to date, bonds are flat as are interest rates. If you want a prior SAS perspective on how quickly market perception can change, see Actions speak louder than words.

Friday normally the Department of Labor would publish employment data but because of the brief government shutdown that number will be delayed. Challenger, an employment recruiter noted that January layoffs announcement were the highest since 2009. The Federal Reserve GDP now chart shows a blue chip consensus current growth at between 1 and 2% but the Federal Reserve number is closer to 4%. Consensus says the Federal Reserve rate reductions might happen later in the year. For related shutdown and delayed data context, see Government Shutdown Adds to Market Chaos.

Warsh Nomination and the Fed

Speaking of the Federal Reserve President Trump has nominated a current Fed governor Kevin Warsh with consensus reaction being it could be worse. Here is some background from the WSJ about Kevin Warsh: Kevin Warsh background at the WSJ. Here is another background piece from the WSJ.

However, Senator Thom Tillis who has a critical vote on the Senate Banking committee says he will not vote to move the nomination forward unless the investigation into current Fed Chairman Jerome Powell is terminated. Does this sound like the KEYSTONE COPS government?

Markets reaction last week was the loudest reaction as stocks sold off and short term bond rates fell while 10 year rates increased. The biggest market moves were gold, silver, and the dollar. Gold dropped by 10% and silver by 30% in one day. The dollar stabilized from earlier this week when it experienced the largest one day decline in a long time. Currency markets stabilized because the perception of Warsh by markets is that he is a stable pick and will behave more independently than other potential picks.

This week the Fed voted to keep interest rates unchanged. Not surprising to markets as the Fed seems to be happy with the current balance between interest rate, inflation and employment.

Government Funding and Consumer Mood

In addition to add to the turmoil, there is a partial government shutdown looming. There seems to be a proposal to resolve the dispute over funding and control over the Department of Homeland Security or DHS. This could be resolved shortly probably by the time you read this.

CNBC highlights the K shaped economy with the top 10% based on income lives in one world and the rest of America another world. The article also points out that this gap is not temporary but will continue and possibly increase in the future. The only narrowing of the gap was during covid when the government provided cash benefits to the 90% of Americans. The gap, especially when viewed by younger Americans, is a warning sign for volatile time and decreasing consumer confidence in our economy and goverment. Wealth gap larger than ever: CNBC on wealth inequality and the K shaped economy.

AI Concentration and Why Diversification Is Back

The Artificial Intelligence trade has dominated large company indexes for two years. The bulk of advances consist of 7 stocks: Google, Amazon, Microsoft, Nvidia, Meta, Apple, Tesla and we can include Broadcom. For a prior SAS discussion of the big seven concentration and why asset allocation matters, see Want to know what the impact of this year's election?.

Modern Portoflio Theory says that you can create a portfolio of diversified asset classes meaning each asset class does not move in the same direction at the same time and have a portfolio that has a satisfactory return but with less risk than a non diversified portfolio. However from the financial meltdown in 2008-9 correlation among different asset classes e.g. large companies, small companies decreased to almost zero until the last 2 years when a more traditional correlation relationship between asset classes has returned. Another distinction for asset classes is growth vs. value with growth the out performer for over 10 years.

In looking at current asset class performance and correlation there is a trend of returning to historical correlation where not every asset class moves in the same direction at the same time. Diversification is back as an important portfolio characteristic. We are onboard. For additional SAS context on correlation and modern portfolio theory, see Stocks and TINA.

For the last 25 years there has been a convergence in correlation of stock markets however the last 3 years this correlation has decreased emphasizing that diversity in geography and capitalization is very important. Diversification remains critical for the best risk adjusted returns. Related SAS perspective: What do inflation numbers say?.

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