Markets, AI Momentum & Demographic Shifts

On the latest episode of Cents of Security, Senior Economist Jose Torres from Interactive Brokers breaks down the Fed’s recent decision, shifting market dynamics, the tech sector’s volatility, record-breaking commodities, demographic pressures, and what investors should watch heading into February.

Mary MacNamara

Hello Everybody and welcome to the Cents of Security podcast!

Jose Torres

Hi, Mary. Doing great. Always a pleasure to join you here. We have a lot to talk about from a markets and a economic standpoint today.

Yesterday January 28th, we had the. Fed decision, the central bank decided to keep rates on hold. There were two dissenters, however, fed Governors Christopher Waller and Steven Myron, who opted who preferred a 25-basis point reduction. Both of them did now Fed Governor Waller’s odds of being nominated to become the Fed chair doubled from a low of 9% on the 28th to a high of 18% today on the 29th. So that was an interesting development. Some folks were talking about how he put that descent in there to maybe appease the commander in chief, but who knows any whom. After the bell, we heard from Microsoft’s Meta and Tesla earnings reports.

Microsoft’s report was received poorly. The artificial intelligence expenditures from an investor standpoint are too high relative to the returns that the company is producing Now, conversely, Meta’s earnings report was terrific. Beat and raise investors were very happy with the report, and it appeared that the.

Strength in the ladder’s performance was going to offset the former’s weakness. However, we saw at 9:30 AM Eastern time, so after these reports were delivered around right after the bell, and then the conference calls were around five o’clock, 5:30 PM Eastern time. We have a lot of overnight trading, of course, and trading was pretty good.

The market was slightly up overnight. The market was up and, but at 9:30 AM Eastern time, Mary, we had some violent selling pressure in the indices, particularly with tech stocks, and it’s really. Symbolic as to how heavy those stocks have become in the indices, that all four major indices were down pretty significantly. They’ve paired a lot of those losses, and they’re doing better now. But eight out of 11 sectors, Mary, we’re actually advancing. So, it just really goes to show how significant the tech sector is. The tech sector is doing bad. It’s hard for the benchmarks to do well, even if 8 out of the 11 major sectors are doing well.

And on this day, what’s leading to the upside is communication services that’s led by Meta. There are, that sector’s up 2.4% right now, real estate is up 1.2%. Energy is up 1.1% and of course the commodity trade has been insane. Gold and silver making fresh records. Again, silver, just shy of $122 an ounce. Gold, just shy of $5,600 an ounce. Copper, also all-time high today driven by a lot of Chinese speculation. So, it’s continued migration Mary away from government issued currencies as well as government issued. Bonds, fixed income instruments that we’re seeing across the globe. We have geopolitical tensions.

We have worries that central banks are too loose. We have worries that some nations are trying to influence their currencies too much. For example, here in the us, President Trump is on record saying that a weaker greenback is good. Of course, that helps the administration’s onshoring ambitions. because when you have a weaker dollar, that means that foreigners can afford more of your exports so that they can import.  So that’s of course part of the manufacturing Onshoring theme.

Fed Chair Powell yesterday during the Fed meeting, he deflected a lot of the questions about why he showed up to the hearing for Fed Governor Lisa Cook. He deflected questions relative to whether he’s going to stay on the board up until 2028, because his term ends in May, but he could stay on as governor and as a voting member until 2028 and still influence policy despite the commander in chief of course not being too happy with him. Of course, the administration wants an expeditious drop in interest rates. And all in all, why is the Fed not dropping? The economy is doing great, employment is softening, but that’s because of a lack of immigration. We saw that census report, Mary, that we shared with each other yesterday showing that the population dynamics and household formation is really dropping.

And that’s really because we’ve been essentially importing childbirths, importing workers. And when we have the closed borders, we have a restrictive immigration regime. It’s hard to get the payroll expansions going. Still layoffs are low. Today we saw initial unemployment employment claims 209,000, continuing around 1.85 million, very in the safe zone.

Four week moving averages, very solid. Just that we’re not going to get those 200,000 jobs added. 150,000 jobs added. It’s going to be more like 30,000 jobs added, 40,000 jobs added. The immigration dynamic is helping on inflation. Home prices are softening, rents or softening. Productivity is terrific.

Employers are doing more with less. They don’t have the immigrant labor. They’re using the labor that they do have as much. On the immigrant labor side, they don’t have as much immigrant labor, so they’re doing more with less employing AI using technologies. And really that, that, that was another thing that Chair Powell spoke about at the presser, that growth has really been resilient.

Third quarter growth was the strongest in two years. Expectation that this year is going to be terrific and that whole re-acceleration theme. The fact that we’re going to have a pickup in economic activity and we could get two rate cuts. That’s what Wall Street’s expecting this year. As well as a forecast trader here at Interactive Brokers expecting two to three rate cuts.

A little more dovish in the ForecastTrader than in other venues. And really when you look at the small cap, Russell 2000, that’s really been leading this year up. 6% year to date. So doing terrific because it benefits disproportionately from an uptick in economic activity, a domestic focus, but also perhaps a few rate cuts.

So, we’re seeing a broadening market. Today’s market action could have been worse, but you had a lot of folks wanting to get. So more of the Dow Jones Industrial kind of names, more of the Russell 2000 kind of names and less of the NASDAQ 100, less of the S&P 500, which of course is more geared to technology.

As far as what was gaining the three leaders that I’ve mentioned earlier, financials, industrials, healthcare and utilities as well.

Mary MacNamara

 All right, so looking at this morning with, this whole AI and meta and Microsoft and ServiceNow and Cloud and so forth, if AI takes a breather, where’s the rotation to.

Jose Torres

Well, Mary, we can have rotation into the cyclical areas. Dow Jones Industrial, the Russell 2000, the same sectors that I just mentioned that are doing well today that are non-tech. Those sectors can do very well. And in an environment where tech is fading. But the economy’s still doing great, and there’s a few rate cuts on the horizon.

You have a broader kind of market, more old school kind of stuff. Industrials, financials, materials energy, et cetera. Those kind of older, old-school sectors can do better than AI and tech, especially when you have this dynamic of three years on and one year off. 2022 was an off year.

And those areas outperformed tech, which had taken a beating. So, 2023, 2024, 2025, of course tech and the Mag Seven outperformed. So now maybe it’s time here for those cyclical areas of the market to begin to catch stronger bids. And then remember also 2019, 2020 and 2021. It was followed by 2022, but which was a down year proceeded by 2018, which was also a down year. So that three years on one year off cyclical dynamic, it is not to be too superstitious folks, but it is on folks’ mind.

Mary MacNamara

What about international? It seemed like the international indexes did really well last year.

Jose Torres

Yeah. Folks wanted to diversify a little bit. There are still some sell America sentiments from President Trump’s controversial and. Confrontational posture at times that upsets some of our foreign allies and adversaries alike. So, you saw that somewhat of that sell America trade. We’re seeing it in the weaker dollar.

We’re seeing it with emerging markets doing well, Europe doing well, and then also those valuations too are a lot. Cheaper. So that’s also a compelling reason to maybe want to diversify a lot. So, the world is essentially still very US focused when it comes to assets, but starting to spread a little bit broaden.

Its positioning a little bit to other areas, particularly for inequities, precious metals, et cetera.

Mary MacNamara

So with this census report, one of the things that came out was the fact that they’re beginning to see, or they’ve been seen, obviously. That there’s an aging demographic that is, obviously shifting to older in the states. So, is that affecting things too, or are you finding that some of the older types are just sitting on their, 401ks and not selling, and that’s what’s keeping the market going? Or do you see this in having any influence?

Jose Torres

Absolutely. I think the influence is more in the labor market. After COVID you had the asset values balloon, both equities and also homes, which are two of the main assets that Americans own, particularly older, wealthier ones. So when that happened, you had excess retirements, you had a lot of folks in their fifties say, hey, look, I’m doing fine.

I want to work part-time, or I don’t want to work anymore. I want to be an entrepreneur, et cetera. So that also definitely affects the labor supply picture. Then also of course from a fiscal standpoint, we have these terrific benefits like social security that are outdated. And that starts to become a challenge when you don’t have the births, and you don’t have the immigrants.

And of course, we know the challenges that Social Security faces. In terms of whether it’s going to be able to deliver the benefits it’s promised to the folks that are paying into the system now. So that’s, that’s also a significant part of the whole demographic story because you have too many people at the top not many people at the bottom, you have fund funding issues of course.

The good news is that we have a lot of examples from around the world. So, Europe is aging faster than us. China is aging faster than us, Japan is aging faster than us, so we can see what that looks like in the developed world. Aging populations usually means lessening growth, slower growth, lower interest rates, lower investment, lighter buoyancy.

Of course, we can learn from what those countries are dealing with and, tackle those issues firsthand here.

Mary MacNamara

So it’s been a little cold up here in the Northeast and we got Groundhog Day coming up. So do you think it’s gonna see more winter or less with the groundhog.

Jose Torres

That’s a good question. We have our climate expert, Patrick Brown. I know you’ve done a podcast with him in the past, but maybe you do another one with him soon and he could inform us on the weather. I know here in Miami we’re going to have the coldest, possibly the coldest days ever this weekend.

That’s going to be this Saturday and this Sunday. So that’s, that’s going to be interesting. I think the weather’s going to go down to the twenties. But overall, I don’t really have much insight for you there, Mary. Next question.

Mary MacNamara

Oh, that’s too bad. So what about February though? What are you looking at? What, are there any like big things in February coming up that you think might be interesting?

Jose Torres

Yeah, we have NVIDIA’s earnings. That’s going to be big. We have some more magnificent seven earnings. We have Google and Amazon coming out as well in February. So that’s, we don’t have a fed meeting. We have a lot of economic data. We’re going to have non-farm payrolls. Consumer price, next Producer Price Index, the typical important indicator. So, we’ll be watching that. We’ll be watching the earnings. We’ll be watching this market action because the market has been more, the S&P and the Nasdaq have been more or less sideways for quite some time here. So, watching to see whether the bulls can take the horns or if the bears are going to come and overwhelm the bulls After three years of stellar outperformance.

Mary MacNamara

Yes. Are you favoring the Patriots?

Mary MacNamara

Yes, indeed. And yes, that’ll be good. I always like watching the commercials too, so it should be some fun. So, Jose Torres, Senior Economist Interactive Brokers, thank you so much for your time. We really appreciate your insights, and we look forward to talking to you again.

Jose Torres

Absolutely. Great to be here, Mary. Always a pleasure. Goodbye for now, ladies and gentlemen.