Foreshadowing January
In the waning days of the current year we turn our focus to the next year. This coming year there will be a lot of activity in January and it is not just due to the “January Effect”. The forward calendar is not that large at around $11 billion. Most pundits are forecasting a volume of $550 billion or more for the full year. It seems that January will be off to a slow start. That will provide ample time to ponder the import of the many policy choices pending that are on the table.
First up is the tale of the two Kevins. We have learned that the finalist for Fed chair will have the first name of Kevin. Both are very well qualified candidates. What is difficult to discern is which one would do a better job of maintaining the independence of the Fed as an institution. We know that the administration is solely focused on lowering rates to stoke economic growth. There is not much of a focus on inflation because after all it does not exist in their view. The 2% target for inflation appears to be very elusive. It will be interesting to see whether or not the 2% goal will be maintained. Weakness in the labor market will also command attention given the dual mandate. Having data back will assist in making informed decisions.
Which leads me to the next critical point for January, the federal budget. The two parties remain very far apart on most of the key spending priorities. The Defense budget appears to essentially be there but most of the other bills are not. It is painful to ponder what the cost of another federal shutdown would bring if there is no kind of consensus by the end of January.
The widest chasm between the two parties is on healthcare. The choice appears to be to continue the subsidies for a period or to create HSA (health savings accounts) with a certain level of funding. The idea of the latter is to put choice into the hands of the consumer. My concern over this approach is that it does not really address insurance coverage. The average hip or knee procedure costs in the range of $20,000 or more. If the amount is not covered, either the hospital increases its bad debt provision or the consumer may be forced into bankruptcy. The latter scenario is not deemed to be a wise approach for the populace at large. Where the compromise lies to garner sufficient votes is anyone’s guess at this point. In the meantime, the subsidies will expire and we anticipate a certain level of chaos.
January is also the time when newly elected officials will be taking their oaths. We will have two new Governors in NJ and VA. Budgets will need to be drawn up and assumptions will have to be made about the many federal actions pending. How much control will be maintained at the state level remains to be seen. Budget formulations need to be mindful of maintaining existing ratings while attaining cherished policy goals.
Other state and local officials will be seated including mayors in a few select cities. Mayor elect Mamdani in NYC appears to be quite determined to make significant changes. Some of the changes will require state level approval. Raising income taxes on high earners appears to be one of the key strategies. Issuing more debt also appears to be a key consideration. What the security for future bonds will be will be an important consideration for the market. NYC already has a high level of debt outstanding. The mayor elect in Miami appears to be more of a centrist in approach. Rapid development and climate change are key areas for attention.
Treasury rates have been trending higher of late while municipal rates have been unchanged on many days. Heavy municipal supply has not been a challenge in 2025 and it should not be in 2026. Aging Boomers are shifting more to fixed income. The volatility of late in equities especially in the information sector is causing some pause. No one sees a recession on the horizon at this point. The policy decisions will carry the most weight going forward.
I wish you a happy holiday season and I look forward to sharing thoughts with you in the new year.
John Hallacy
John Hallacy Consulting LLC
12/15/25
Recent Comments