Muhlenkamp Quarterly Market Commentary – January 2026

by Jeff Muhlenkamp, Ron Muhlenkamp of Muhlenkamp & Company, 1/8/26

Fellow Investors,

The economy in the 3rd quarter grew by 4.3% adjusted for inflation, the highest growth rate for the year. The inflation rate as measured by the CPI was 2.7% in November (the latest data point), in the middle of the 2.3% - 3.0% range it has been in all year. The U-3 unemployment rate in November was 4.6%, the highest it’s been all year. The services sector, as measured by the Services Purchasing Managers Index (PMI), continued to expand in November with an index reading of 52.6 (a reading above 50 indicates expansion), even as the manufacturing sector continued to contract in November with a Manufacturing PMI reading of 48.2. We’ve heard the economy described as “two-speed” or “k-shaped”, usually with the implication that wealthier Americans are doing great and average Americans not so much. We see the breakdown differently: the service economy is doing fine, manufacturing not as well. Since services are a much bigger piece of the economy, the overall picture is one of modest growth.

In response to that economic picture, the Federal Reserve cut the Federal Funds Rate three times this year: in September, October, and December for a total cut of 0.75%. Presumably, they are more concerned about rising unemployment than they are about inflation being above their 2% target. The Federal Reserve also restarted its purchase of Treasury Bills in December, saying they will buy up to $40 billion per month as part of a “Reserve Management Purchase” program. Federal Reserve members stated repeatedly that this was “not QE” (quantitative easing). As near as we can tell, the only difference between this exercise in money creation and the previous exercises in money creation is the stated intent – the actions are the same. The questions we ask ourselves (and would be happy to ask Fed Members if we get the chance) are “Why are you restarting asset purchases when inflation remains above your 2% target? Won’t that tend to create more, not less inflation?” Truth be told, if we were able to ask those questions of the Fed, we would be very surprised if we got a straight answer. Our operating assumption is that they have restarted asset purchases to keep interest rates on government debt affordable (for the government). The risk that this keeps inflation higher than their target is something they are willing to accept.

Interest rates declined during 2025, as did oil prices. The 10-year Treasury Yield fell by about .4% from the start of the year to year’s end, and the 30-year mortgage rate ended the year at 6.26%, down a full 1% from the start of the year. Oil prices fell from $70 per barrel in January to $58 per barrel in December, a 17% drop. In our opinion, the drop in oil prices has kept inflation from running higher than the 2-3% we’ve seen this year.

The US stock market ended the year near its all-time high, having been led for most of the year by AI related companies. As we’ve previously stated, we believe the AI boom will eventually bust, but we don’t know when. Anecdotally, we observed that when companies involved in AI announced additional capital spending, it generally created a short-term boost to their stock price up until about mid-October. In November and December, however, similar spending announcements were generally met with swift declines in stock prices. This reversal in price action when capital spending increases are announced appears to us to be a sign of waning excitement about AI. We continue to have limited exposure to AI.