With Great Volatility Comes Great Opportunity

Markets may be climbing a wall of worry, but investors continue to swing past bad news — chasing dips, ignoring danger, and riding momentum through uncertainty. In this week’s Midweek Market Update, the “Spider-Man Market” takes center stage as Andrew Wilkinson, Steve Sosnick, and Steve Sears unpack why every headline seems bullish and how retail traders are reshaping the landscape.

Summary – IBKR Podcasts Ep. 301

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this week’s Midweek Market Update. My name’s Andrew Wilkinson. I’m joined by Interactive Brokers Chief Market Strategist Steve Sosnick, and our special guest today is Barron’s columnist Steve Sears. Welcome to you both, gentlemen. 

Steve Sosnick 

Great to see you, Andrew, and always a pleasure, Steve. 

Steve Sears 

Thank you, Steve. Same. 

Andrew Wilkinson 

So, I’ve been involved in financial markets for 35 years now, and this has to be one of the wackiest I’ve ever seen. The U.S. government is now officially shut down. We’re recording this on Wednesday, which carries potentially severe implications for government workers. There are out-and-out wars in Ukraine and Gaza, and an increasing sense that we are no longer at peace with Russia. 

The U.S. Secretary of War, no less, yesterday gathered top military officials at Quantico. So, Steve Sears, you’ve written about investors climbing a wall of worry before. That concept must be resonating in your head these days, isn’t it? 

Steve Sears 

It is, and I’m amazed that the wall continues to grow and equities continue to advance. Options volatility remains subdued, and even within the Treasury markets, yields are quite reasonable. Even funding spreads on those yields in the various fixed income markets are operating completely within normal parameters. I think that we’re truly in unusual times. I’m not going to say that this time is different, but the one thing I keep coming back to in my mind — that I find to be very intriguing — is that I think, for the first time perhaps in history, we have a very educated, very sophisticated retail investor operating in ways that we’ve never seen before. 

Individual investors really only entered our markets around 1975, and really since the mid-90s. I’m stunned by all the things that they discount — by their collective impact on equities. One of the most interesting things I’ve seen is how some of the major sell-side banks, particularly in the derivatives strategy desks, are treating individual investors as if they were equal to hedge fund investors, who tend to be more sophisticated institutions — at least superficially. So, it’s truly unprecedented times, just as the risks that you enunciated at the beginning are unprecedented. 

Andrew Wilkinson 

Steve Sosnick, what do you make of it? 

Steve Sosnick 

I think if I’m going to term this market, regarding Steve’s “wall of worry” comment, this is the Spider-Man market. Basically, this market just scampers up the wall of worry, and any little crags that are in its way — any little outcrops — are essentially ignored. 

As we’re taping this — it’s the morning of October 1st — we saw futures lower overnight, which has actually become typical. By the way, six of the prior nine first trading days of the month this year have been lower. We were looking at number seven. By the time we’re taping this, we’re basically back to unchanged. There are a few truisms that I’m seeing in the market — “truisms” I’m using in quotes. Number one: All news is good news. Government shutdown? Inconvenient. But hey, it’s good news, because if it leads to a weaker economy, that leads to more rate cuts — and so, good. 

This morning we got weak ADP numbers. Again, in theory, a lousy economy should be bad for stocks. But if you can do a little mental jujitsu and say that leads to lower rates and the better prospect of rate cuts — then let’s rally. You can basically do this with anything at this point. The market has become very adept at fitting the desired outcome to the narrative, rather than the other way around. And I think that, to me, is the biggest fundamental change in markets that I’ve been seeing recently. 

Steve Sears 

Something that I find fascinating is that the minute the ADP report came out, the ticker was filled with headlines saying “100% chance the Fed will cut rates.” 

And I remember, when I started my career, that we didn’t have this type of feedback loop, if you will — and I think that’s amazing. It’s anything that’s bad is good, and good is really good. That said — and when we spoke last, we discussed what our outlooks were and where we’d want to be invested — I said equities, and I still say equities. 

Despite everything, if you were to strip everything back and do that sort of reductive analysis — earnings thus far are growing. And as long as earnings are growing, you’re going to see stock prices continue to rise, in my view. There’s always risk. There’s always an exogenous risk — like we get a fully hot war that spreads in Eastern Europe — but frankly, I’m not even sure if that would be fully negative for more than a couple of days or a week before it gets priced in. 

Steve Sosnick 

Markets have become very adept at ignoring geopolitics, and to be fair, to a large extent they should — because ultimately, most geopolitical events don’t affect the things that affect stock prices. That’s stock fundamentals — earnings, revenues, cash flows. 

Honestly, if the government shuts down — this was the facetious argument I made to someone (it wasn’t really facetious) — if the government shuts down, what does that do to Nvidia, Microsoft, and Google? Nothing. So let’s ignore it, and let’s ride them higher — that’s the mentality. Whatever doesn’t kill you in this market makes you stronger — and in this case, a lot stronger. And since this market’s eaten a lot of potential poison over the past three years, it takes a lot to kill it. 

Steve Sears 

You know what though, Steve — a couple of years ago there was a documentary that came out. It was a fellow from Hong Kong who had been raised in Boston, and his father had literally escaped Hong Kong during some of the more difficult times in China. 

The father basically swam from mainland China, went to Macau, made his way out, came to Boston, and set up a Chinese restaurant. He raised his kids, the kids went off to attend university, and then, many years later, the son takes the father back. All the relatives are living in Hong Kong. There was a line in this that I think of quite a bit as we look at the markets. They were talking about inflation — about how dynamic the Chinese economy had become. 

And they all said that in order to keep pace with the cost of living, we had to be investors. 

And I think that a lot of people feel that they have to be investors — and that this has some type of upward impact on stocks. And I’d be curious to hear what you think about that — and what, amongst the clientele you guys service, you’re seeing. 

Steve Sosnick 

Our clients are relentlessly buying stocks. On any given week, I don’t have great clarity into what they’re doing, but I can see, on a daily basis, the 25 most active names on our platform. In any given week, that number ranges from 25 — all 25 of 25 — to, in a bad week, 20 of 25 or 21 of 25. Because again, if we go up, let’s chase the rally — there’s momentum to be had. If it goes down, there’s a dip to be bought — let’s buy it. To our customers’ credit, some of the biggest numbers — some of the most biased numbers toward the buy side — were in April. So, I will say it’s worked for them. Buying the dip has essentially worked relatively unimpeded for the better part of, I don’t know, pick your number of years. 

And so, if something keeps working for somebody — for a group, for a large group of people — they’re going to keep doing it. Now, the perspective here is — I saw a stat this morning, I wish I could cite it, I forget exactly where I saw it — but someone estimated that only 4% of portfolio managers were professionally investing during the late ’90s. I’d also imagine that number, among active investors — particularly the most active investors, the most active traders — is probably about right. 

So that goes back to the tendency of history. History doesn’t repeat, but it often rhymes. And I’ve been seeing rhyming elements to the internet bubble. Again, not repeating — because there are a lot of constructive differences as well — but when I start to do the numbers about how much money is required to build out these data centers, it’s got to come from somewhere. And I think back to the example of Global Crossing or Northern Telecom, which were among the companies wiring the world — and it worked. By all means, it was something that needed to be done, but no one made any money from it. 

I start to wonder — do the math on Oracle. I put this in one of my columns. If they’ve got a $300 billion data center deal with OpenAI — sounds fabulous, that’s phenomenal — they’ve got to spend a lot of money to build the data centers. They’ve already borrowed $18 billion to do it. 

Here’s the problem: OpenAI — the last annualized revenue numbers I saw from them were $12 billion a year in revenues, and their cash burn was $8 billion. So how are they going to get enough revenue to fulfill the deal with Oracle, and at what price? That’s where I start to see these parallels. And I will say that a lot of these deals — I may have used the term incestuous, but that’s probably a bit strong — there’s certainly a lot of circularity to them. 

Steve Sears 

By any stretch. 

Steve Sosnick 

I’m sorry? 

Steve Sears 

I don’t see them as being arm’s-length transactions. But the thing that fascinates me is, I was reading a non-financial publication — there was some new large language learning model that was essentially able to do things, in terms of computing power and synthesizing information and producing workable results, that were hitherto considered to be an impossibility. I remember, I guess as a little boy, I always wanted to be able to walk through the library and touch the spines of books and know what was in them. And of course, it’s eluded me. But it seems to me that this AI, at its best application, can do just that. 

And if you speak to your friends in the medical profession, they talk about the ability to diagnose and discover new treatments — to come up with new prescription solutions that defy human comprehension. And I often think it’s a lot like maybe in your days when you were on the desk, and your desk was so sophisticated at using computer power to price. And I think that we’re there. So, is it a bubble? Is it a bubble now? I don’t know. It certainly seems to be elements of frothiness. But that said — if we’re going to ride it up, you want to be long calls and short puts. And if things are going to top, you want to be long puts and short calls. And I think it’s just a trade. 

When the internet was being built out, a colleague of mine met with Larry Ellison — 

Steve Sosnick 

There’s that. 

Steve Sears 

Then, like now, we were trying to figure out exactly what was going on, and there were all these sorts of conversations. My colleague came back and said — and I don’t think he ever published this — that Ellison told him his vision, or his dream, was to have one of his servers — at least one of his servers — in everyone’s house, in every company. And I think that’s largely happened. 

Steve Sosnick 

That’s clearly what he’s going for now — not necessarily in everybody’s house, but with massive data centers, the vision is still the same. And I will stipulate that everything the internet promised came true — it just didn’t work out financially in the initial way that people had expected or hoped. That’s where the disconnect starts to come in. 

Ultimately, if all these billions of dollars are going to be spent — right now, companies are being rewarded simply for spending the dollars. And to a large extent, many of these companies can. Meta, Microsoft, etc. — these things are cash flow machines. I think, though, what you’re starting to aim for — and you do have to wonder if this paradigm is like the Netscape… is ChatGPT the Netscape browser of the AI era? I still venture to say that the best AI model is probably one that either hasn’t been written yet or is being written by a high school or college kid somewhere. And I used to just say in Silicon Valley, but that can be literally anywhere now. 

And I do start to wonder whether the better AI models aren’t more focused, rather than trying to just be masters of everything. I think the better models probably become — wouldn’t I? I would think if I was a doctor, I’d rather have AI models that are really, very specifically trained on medical data. 

Steve Sears 

And they exist. The guys are telling me they have AI — I think Microsoft is very big in this — where they would otherwise have to spend hours each day transcribing or have a stenographer follow them. The AI enables them to do it like that, freeing them up to see more patients. 

Steve Sosnick 

One of my friends — his family business made millions doing transcription of medical data.

Steve Sears  

Right. 

Steve Sosnick 

They sold the company, and my friend is very wealthy as a result. But yes. 

Andrew Wilkinson 

Steve Sears, we had FAANG. Then we had the Magnificent Seven. And both of those lost their luster, with AI names picking up the leadership. What companies are you seeing that are taking up the front running? 

Steve Sears 

It would still be the Magnificent Seven, as they say. You look at your top 25 at Interactive Brokers, and I think that’s a pretty decent representation of what’s hot. If you look at the environment in which we operate, what’s hot gets hotter and what’s cold, colder — until we see something happen. 

If you go back to the influence of the news cycle and this 24/7 jackhammer of information — last week, things were very bad and things were going to go down. This week, things aren’t so bad. And you can choose your name and swap it out week by week. But I think you’re going to continue to see these trends. You’re going to continue to see the Mag Seven. Take a look at Meta a couple of weeks ago — Meta was trading under the cloud of what the Street politely termed as obscene spending on data centers, right? And you’ve seen the stock winnow down — it’s down 20 points today purportedly on news that they’re going to create their own chip, as opposed to just buying from Nvidia. 

I’d be willing to bet anybody, sooner or later, that stock’s going to catch a bullish wind and rally. Why? Because someone’s going to come out and say, at a sell-side bank, “I think it’s fairly valued,” or “People aren’t looking closely enough at all the merits, such as X, Y, and Z.” And the thing will rise 50 points in a week. And then it’ll rise up. Look at Tesla. Tesla’s another great example. Tesla’s in the gutter — Tesla’s basically now almost at its all-time high. And you could just swap out everything I said about Meta, tweak it a little bit to make it specific to Tesla — and there we are. 

We’re in an innovation era, and amazing things are happening all around us. The only question we have now is one of price. And the big guys are going to push it up, and the big guys are going to push it down. Retail’s going to glom onto it and make some money — although I think, probably, they don’t make nearly as much money as they think they’re going to make. But they’re making money. And as Steve referenced earlier, they’re going to keep on doing it. And I think we’re going to see these big tech names — you’re going to see anything that can benefit from the allure of AI. If we changed our names to “AI,” Steve, we’d probably — something great would happen. 

Steve Sosnick 

That was a big deal. That was a big deal in 1999, where companies would do that. 

Steve Sears 

So I was there, and I covered Amazon’s IPO at $14. I remember Pets.com. I remember all of the big, hot names. And I remember when Amazon was coming public, the Street was very negative on it, and there was a lot of talk — when the thing was still being syndicated on the Street — that it was nothing. And of course, he’s now, I think, one of the richest — or one of the richest — and everybody buys their crap off of Amazon. 

I think we’re just in a transition. And to get back to the point earlier, Andrew, about the wall of worry — I would put forth that when we’re having conversations like this, and there’s a thousand other people having this conversation, it creates that exquisite tension that offsets most of the concerns. Not all, but most — because whatever takes us down, we never really see. We didn’t see it in ’07–’08. We did see it in ’99, because Barron’s talked about all these companies burning cash flows. 

But I think the more we talk about it, the less risky it becomes — which doesn’t mean that it’s not risky, because it’s always risky — but it enables those of us who know how to define risk to better define it. 

Steve Sosnick 

To quote Oscar Wilde, “The only thing worse than being talked about is not being talked about.” 

Steve Sears 

Oscar Wilde also said, “A burnt child loves the fire.” 

Steve Sosnick 

Both can be true when it comes to this market, can’t they? 

By the way, I’ve been trying to make “Gatton” a thing — adding Oracle to the Mag Seven lingo. Somebody then pointed out that I left out Broadcom. I need a “B” somewhere, but we could double another one of the A’s, because its symbol is AVGO. 

Steve Sears

I… that’s extremely— 

Steve Sosnick 

Okay. 

Andrew Wilkinson 

We’ll figure that one out. Final question for Steve Sosnick — you mentioned the ADP report today, loss of jobs for the economy. What’s your prediction for Friday, Steve? 

Steve Sosnick 

Nothing. We’re not going to get one. 

Andrew Wilkinson 

No way. What’s— 

Steve Sosnick

What my prediction is — there have been conflicting reports. In theory, I do believe, actually, the report is done. So I think they could report it, because — you’ll need a better source than this — but I read somewhere that they actually do it on Tuesday, pre-release it to the people who need to know on Wednesday, etc. 

But there have been enough comments saying that it’s not coming. So my prediction is: not coming. And somehow, the thing that I will say here is that this is another one of these careful-what-you-wish-for things. 

If the Fed is truly data-dependent and you don’t have the jobs report on Friday, and you don’t have BLS releasing PPI and CPI next week — we did get the core PCE number, which was okay, annualizing to a number that should be well above the Fed’s target — but again, we’ve been getting that for months and it hasn’t really mattered to anybody anyway. But I do think that has to put a little bit of reticence into the Fed if you’re going to claim data dependency and you don’t have data. So let’s see what happens. 

Steve Sears 

Where’s the backup generator? They need — they need a Generac or something! 

Steve Sosnick 

It’s not that — it’s the people showing up to do it. If I’m not getting paid in— 

Steve Sears 

When we have all this data produced by the private sector — which is probably higher quality and is in the lingua franca of the investor class — I think they can probably figure it out. 

Steve Sosnick 

We got the private data today, and it’s not particularly pleasant. But again, if they’re going to be data-dependent — you’re right. To some extent, you can’t fully replicate the government data with the private sector. 

Steve Sears 

References — all data is created equal, but some data is more— 

Steve Sosnick 

There we go. 

Steve Sears 

I’m Steve Sears. I write the Striking Price column for Barron’s. 

Steve Sosnick 

And I’m Steve Sosnick. I’m the Chief Strategist at Interactive Brokers, and it’s been a pleasure chatting with you, Andrew. 

Andrew Wilkinson 

Thank you, everybody. And don’t forget — subscribe wherever you download your podcasts from. Bye for now.