The Fed blinked—and liquidity blinked back.

Interactive Brokers’ Jose Torres explains why the Fed’s short‑end move and easing mortgage rates set up small caps and homebuyers for a more broad‑based 2026.

Mary MacNamara  

Hello everybody, and welcome to the Cents of Security Podcast. Today, I’m here with Interactive Brokers’ Jose Torres, to discuss economic news in the markets. Welcome Jose. How are you?

Jose Torres  

Mary doing great. How are you?

Mary MacNamara  

I am doing great too. So, lots going on. The Fed cut rates for the third time this year but signal the long pause. How should listeners read the one and done dot plot for 2026?

Jose Torres  

Yeah listeners aren’t really paying much attention to the one and done dot plot. In fact, our prediction market is expecting roughly two rate cuts next year and really the main takeaway from yesterday’s meeting and why the markets are so buoyant today on Thursday, December 11th, the day after the meeting is that the Fed began talking about resuming its purchases of treasury securities at the short end of the curve to shore up liquidity conditions in the financial system.

Now that’s terrific news for cyclically oriented rate sensitive areas of the market. That’s why today despite some negative AI news, Oracle missing on its cloud sales, while also dialing up its artificial intelligence, capital expenditure projects. Despite those negativities, which investors are now worried that these firms are spending too much on ai with capital returns being questionable. Despite those concerns, Mary, still record highs today for the Dow Jones Industrial average as well as for the Russell 2000. Let’s look at the S&P, not at an all-time high yet. But pretty close. Only 0.2% away. Of course, that’s just a modest green day. One more green day for the S&P.

It’s at 6903, needs to get above 6920 to make a new record. So, we have a growing economy. The Fed acknowledged that the cycle is on solid footing because its projections were upgraded. Its GDP forecast that is, and then Mary, the inflation estimates were moved downward. Unemployment was neutral, but that was enough.

Stronger GDP. Softer inflation for market participants to get up and cheer alongside the treasury bill purchases because a faster pace of economic growth paves the way for stronger corporate earnings going forward while softening inflationary pressures opens the door to lower borrowing costs. So of course, that’s a great backdrop for investors.

We want more profitability and we want cheaper borrowing costs because that can push up prices on the one hand, due to earnings. And on the second hand, due to the potential for more valuation expansion, ’cause the higher interest rates go, the harder it is to expand valuations. So really a really great day, a really big surprise.

The Fed’s going to start injecting roughly $40 billion per month into the treasury market. Why are they doing this? Because recently we’ve seen banks, and we spoke actually about this in one of our previous Cents of Security podcasts, maybe the last one or the second to last one that we’ve done prior to this one on December 11th.

And we’ve seen that the facilities of the Fed have shifted from the reverse repo facility in an environment where banks have a lot of cash and not that many securities. To the opposite. Now they’re using the repo facility, meaning that they have securities, but they don’t have that much cash. So, what happens is you start seeing usage in that facility, and when there’s more demand for that facility, all of a sudden interest rates, short-term interest rates start to increase and threaten to move out of the Fed’s range. The Fed’s range right now is 3.5 to 3.75%. Last time we saw rates explode to the upside, it was back in 2018, 2019. We saw some episodes there near quarter ends, similar time to where we are now towards year end. Where banks have wanted to hold onto their cash so then liquidity was weakening in the system, softening.

So now the fed introducing, stepping in and purchasing a lot of those securities, it really allows bank reserves to be alleviated and allows proper function and smooth function, rather across the banking system, which of course is great for the stock market.

Mary MacNamara  

So Powell says job growth may be overestimated by 60,000 or so jobs per month while initial claims jumped to 236,000. How worried should listeners be about the labor market, if at all?

Jose Torres   

You know what? I’m not that worried. Firms are doing well. Looking like a re-acceleration in the economy. We got the government reopened after the longest shutdown in history. That’s serving to be a cyclical tailwind in the short run. Also, President Trump’s signature taxation package passed in 2025 is serve is going to serve to boost earnings and economic performance in 2026.

Corporates are going to benefit from, of course, softer taxation charges. Then also you have that depreciation write off where you can write off a hundred percent of capital expenditures in the first year. That’s also going to be a benefit that can help s support more share buyback programs, additional dividends, as well as other kinds of investments.

So why would employers really trim labor in that kind of landscape? Of course, we’re getting conflicting. Information across different sources. You’re still in a low hire, low fire environment, but why are we in a low hire environment? We don’t have the immigrants because the immigrants, when you have an open border, those folks come in and the vast majority of them want to work right away to.

Improve their economic fortunes as well as to send money back home. They may have parents, their wives, husbands, children, grandchildren, et cetera. So you don’t have that strong support to the labor market. You don’t have as many people, so you have a labor supply issue and then you also have a demand issue.

But the demand issue is not that significant and just that when you pair it with the supply issue, it really makes the labor market confusing. And you have the AI adoption that’s really containing early level career entrants of folks that just graduated college. You know that unemployment rate is particularly high and then rates have been too high for some of those areas of the economy that really need softer borrowing costs to begin to expand headcounts.

Namely, we’re talking about real estate slash construction, manufacturing and small business. Pleased to say though, this week we got to forget about unemployment claims because during the holidays those numbers are crazy. So yeah, they rose up to 230, 236. In this report, but the last report, Mary, we saw the softest number in 38 months, and now the next week we have the highest number in 13 weeks.

Continuing claims this morning, the lowest number in seven months, got to go back to April, which is a shocker. So the holidays are weird for unemployment claims, but other data points that came out, ADP on Tuesday, that new weekly indicator terrific to look at, I’m fascinated by it. Very happy that it’s being made available. So, a little confusing on the schedule. It’s every week, but on the weeks that the ADP monthly report comes out, there will be no weekly report on Tuesday. Usually, the ADP monthly report comes out around the first week of the month, right before the BLS Jobs Friday, which could fall, anywhere from the first, second day of the month up to the eighth or ninth day, first 10 days generally speaking.

Those numbers were good. Earlier this week, that was December 9th, that same day, we also got small business optimism ticked up stronger sales expectations, also heavier hiring intentions. Small businesses are looking to pick up more workers. However, one of their biggest issues is labor quality. They find that it’s hard for them to put out a job posting and acquire the candidates that they need to fulfill the specific roles. And then also you had Jolts the job openings and labor turnover survey. We got numbers from September and October. Were delayed due to the shutdown. Big beats Mary. Big beats showing that labor demand is still robust, roughly 7.6 million, 7.7 million off of the top of my head. Big beats while she was expecting around 7.2 million. So it’s showing you that, you know what? Employers still want labor. They have specific roles. They don’t just want to take anybody. They need to have workers that can do what they need.

And we’ve had that mismatch in the labor market. Ladies and gentlemen, marry. We’ve had that mismatch for a long time. Back when I was at the Bureau of Labor Statistics in 2016, we used to talk about it. How we had back in that during that time 6 million unemployed folks or so, and 6 million job openings, and the Secretary of Labor and the president would always talk about how come we can’t just get those 6 million people that are unemployed on the one hand and the 6 million for higher signs?

On the other hand, why can’t we just. Put them together. Just so happens that the folks that are unemployed can’t do those jobs because they’re not skilled for it.

Mary MacNamara  

I’m going to coin a new term. “Jolly Jose Torres”.

Jose Torres  

Do I…

Mary MacNamara  

You’re jolly. It’s like right before the holidays. I always feel upbeat when I talk to you about all the awesome things with the economy. Okay, so mortgage rates dipped. to the lowest of the year right after the fed cut. What does that mean for prospective home buyers in 2026.

Jose Torres  

We are in a buyer’s market, Mary, sellers are out there. They’re looking to transact at high prices, and the reality is that because rates have been so high. It’s the affordability picture has been dampened, so there’s really a wide gap between the sellers and the buyers at the same time, however.

Homeowners aren’t in a rush to sell. They need to live somewhere. We’re seeing, a lot of behaviors folks are listing for two, three months, and then they’re just taking the house off of the market because they’re not getting the offers that they’d like.

Part of that is you have a high degree of equity build up in the houses. You’re not in a 2008 kind of situation where everybody. A lot of people were underwater, had limited numbers of equity, 5% equity, 10% equity. You have a lot of people, 50% equity, 75% equity cash buyers, 100% equity. So, you know, these folks, they don’t want to take a 200,000, 100,000, 50,000, $300,000 haircut on the price that they paid.

They’d rather just wait and over time. Home prices go up. But back to the immigration story. Rents are softening. Home prices are softening. You don’t have those immigrants coming in, they want to rent places. That puts upward pressure on rents. That also drives valuations north, right?

Because homes price\ is highly influenced by how high you could rent that property for. So because we’re seeing softening rents, you’re, which by the way, chair Powell mentioned yesterday in FOMC, the Powell Pressor, because you have those softening rents, you’re also seeing softening price action.

But there’s a lack of price discovery because like I said, the sellers are not in a rush. It’s not like the stock market where you have price discovery every second, tick by tick. These people can say, oh, really? You don’t want to buy at this price? Then I’m not selling and I’m just going to wait.

There’s a 50% chance according to our prediction markets, that the Democrats get back in the White House in the 2028 election. So a term would start in 2029. There’s also a very high chance the Democrats are going to win the midterms in the 2026, and next November, this November coming up 11 months. A lot of those home sellers are also waiting because there’s an expectation that once the Democrats become more influential in Washington after some election wins then all of a sudden, the border is going to open up and then we’re going to have immigrants starting to flow again. And then that should support home valuations while at the same time, of course, rates are coming down.

Mary MacNamara  

Interesting. So last question. How’s holiday spending going? What are you seeing?

Jose Torres  

Holiday spending’s been pretty strong. We heard from American Express strong numbers. Black Friday was also robust. So, consumers are feeling bad. The sentiment numbers have been poor, in America, this is the culture. Okay? You’re feeling great. Go and spend, you’re feeling neutral. Go out and spend, you’re feeling bad.

Mary, what do you do?

Mary MacNamara  

Shop. Shop therapy.

Jose Torres  

You got to go out and spend.

Mary MacNamara  

That’s it. Looking for those deals…

Jose Torres  

Absolutely. Absolutely. So, folks are out there spending on services, on goods. Definitely a more of an uneven kind of situation where the wealthier households are increasingly taking up a greater share of consumption and keeping the economy afloat. Of course, the middle-class cohorts and the lower-class cohorts are having a, they’re under a little more pressure.

Or a lot more pressure when you consider that they don’t have as much exposure to real estate markets. For example, they don’t own multiple homes in most cases, they don’t have vast investment portfolios in most cases, and we know that from the pandemic to now, we’ve had inflation shoot up and asset prices are through the roof.

Okay? The S&P 500 is up 17% year to date, following back-to-back years of returns, north of 20%. So, you have this environment where you, the 401k people, the people with the investment accounts are doing, a lot of the spending, because they look at their portfolios and hip, hip, hooray!

But if you’re expecting, your paycheck to go up 25% or 30%, it doesn’t really work that way. Folks that are more levered to the labor market rather than the capital markets, they’re facing that struggle of having to keep up with higher prices, having to manage loftier interest rates.

And that’s, that’s pressuring them a little bit because they’re having to choose a lot between staples and discretionary things.

Mary MacNamara  

In other words, we need the Very Wealthy to go out there and shop right.

Jose Torres  

We do. And they have been.

Mary MacNamara  

They need to do their part and get out there!

Jose Torres  

They have been, and I think I, but I think in 2026, you know how much I think we’re going to see a flip. I think that the gap is going to start to narrow. I think capital markets will still do well. But I think that, I think it’s going to be a more broader recovery in the 2026.

And I think that who’s going to lead the markets higher is going to be the small caps. The smaller companies that are going to be, that are more indicative of the actual economy because for the last few years we’ve had a market and an economy that has been different worlds, really.

When you consider the AI theme and how much the AI and the technology, the modern technology, how much that’s driven, equity, price, appreciation versus people on the street and how much they actually understand or use or have a relationship with AI at all. Very bifurcated and different those companies have been doing terrific.

But then the companies that people know, regular people on the street, right? The Home Depots, the Targets, the, a lot of the retailers, a lot of the fast casual restaurants. Okay, SweetGreens Cava, Chipotle et McDonald’s. That’s not fast casual, but you get the gist folks. Those firms that are more levered and have more exposed to regular people in society, right? They’re seeing, wow, people are really pulling back. They don’t want to pay the $25 for the salad anymore. Maybe they only want to do it once or twice a week. They don’t want to do it seven days a week, or five days a week. So they’re really pairing back.

Those firms are feeling the real pressures of affordability in the us but the AI companies, they’re building these huge data centers and they’re automating a lot of things and they’re using the modern technology to progress their operations and to expand it to different verticals, so they’re not as exposed to the quintessential American man or woman.

Mary MacNamara  

That is for sure. Alright, Jose Torres of Interactive Brokers, thank you so much for your insights. Really appreciate it and

Jose Torres  

My pleasure, Mary.

Mary MacNamara  

We’ll see if we can get one more in before the end of the year and definitely it should be a spicy 2026, I hope anyway, at the end of the day, Go Mets, right?

Jose Torres  

Oh yeah, I am a Queen’s boy. You see me wearing the blue and the orange. It’s not baseball season, but it just so happens that this is the combination that I chose today, folks. So let’s go Mets!

Mary MacNamara  

I love it. All right, thank you everybody.