Wildfires and Washington: Economic Turbulence Ahead

Join Andrew Wilkinson, Steve Sosnick, and Jose Torres as they explore the economic fallout of California’s wildfires, the impacts of a strong jobs report, and what the new administration’s policies could mean for markets in 2025. Turbulence ahead—are you ready?

Summary – IBKR Podcasts Ep. 217

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, everybody, to this monthly economics and markets edition of our IBKR podcast. Joining me today are Steve Sosnick, Chief Market Strategist, and Jose Torres, Chief Economist. Welcome, guys. 

Steve Sosnick 

Hello, Andrew. Hello, Jose. How are you guys? 

Jose Torres 

Hey, Andrew. Hey, Steve. Happy New Year. Great to be here. 

Andrew Wilkinson 

Glad to be here. And it’s a wild and wacky Monday morning. We’re just recording this episode as the markets are opening, and it’s an ugly open. 

We saw surprising strength in the December jobs report last week that proved catastrophic for equity prices and saw bond markets also take a beating. 

So let’s start this month with Steve Sosnick. Why do you think, Steve, stocks seemingly dislike the healthy jobs report? 

Steve Sosnick 

Short answer, because equity traders have become liquidity-addicted, not really fundamentally focused. Realistically, let me bring in a lesson from where we were at this time last year. Remember, this time last year, we were looking for about seven to eight rate cuts. We only got the equivalent of four, but yet the markets zoomed. Why? 

Because the economy was good. Because we didn’t need four rate cuts. We didn’t need seven or eight rate cuts. I’ll argue we didn’t really need four either, which is partially why we zoomed so much. 

But regardless, the markets should be happier not to get rate cuts than to have an economy that requires rate cuts, but that’s not the thinking right now. 

I think there’s a lot of uncertainty. A lot of good news got priced in. A lot of uncertainty ahead of the inauguration, which is a week from today as we’re taping, but also a market holiday. 

As to whether some of the issues about the tariffs and potential immigration restrictions, what effect they might have on the economy. 

And the bond market can’t get out of its own way. Again, some of that’s not terrible because part of the reason the bond market’s going up—the yields are going up, I should say—is because rate cut expectations have diminished. We’re now between one and two for 2025, down from about four not too long ago. 

That rise is largely commensurate with that. So I’m not that concerned, but again, markets do strange things, and markets have a nasty way of making as many people wrong as possible. They have a way of puncturing consensus. And the consensus was we were going to get off to a great start in January to a great year. 

That seems to be not in play a little bit. Little fun fact, out of the 15 sessions immediately prior to today, eight of them had moves of greater than 1 % in one direction or another in the S&P 500. Five down, three up. We went months without 1 % moves for good portions of ’23 and ’24. 

So maybe we need to get used to a little more volatility. Maybe we need to get used to the idea that not everything moves in one direction all the time. 

Andrew Wilkinson 

Smells a bit fishy to me, Steve. 

Jose, we reported live on X over the jobs report. Give people your take on the salient pieces of the nonfarm payroll report and the employment situation. And do you largely agree or disagree with what Steve had to say there? 

Jose Torres 

I totally agree with Steve. So much of the rallies in ’23 and ’24 were driven by valuation expansion and extreme concentration. So when you have a concentrated rally and you have some kind of derailment, in this case, uncertainty on tariffs as well as rates, that does lead in the medium to long term to some fragility, because how long can you stay? 

Steve, of course, is a strategist, I’m the economist, but how long can you stay that concentrated and have gains that buoyant into the future, in excess of 20 %, right? 

Steve Sosnick 

5 %, 7 %? You’re not supposed to expect 20 %. The part that got me, and my one regret about not being allowed, encouraged, whatever, to put out numbers was, once I saw that everybody’s price targets were up 7 to 15 % for ’25, it was killing me that I didn’t put out something lower. 

I alluded to it in plenty of commentary, but I didn’t say 5, 5, 5 or whatever the number should have been, and I still stand by that. 

I think that there’s a lot of uncertainty coming down the pipe, and if nothing else, get used to some volatility. It doesn’t kill you to have markets move a little bit. 

And by the way, if you’re a trader, trade. This is what markets do for you. But people are much happier, people are much more comfortable trading from the long side. It’s much easier to buy dips and chase rallies if you think the market’s going to bail you out by going up again. 

It’s not so easy if the market’s got some back-end fill and choppiness and maybe a little bit of an even downward tone. 

You have to sometimes switch your mood from buy low, sell high to sell high, buy low if you’re an active trader. 

So none of this is a killer, but it requires a little bit of a different mindset. And like you’re saying, Jose, you can’t just expect this Pollyanna scenario to continue year after year without at least a speed bump or a hiccup or something. 

Jose Torres 

I’m happy you mentioned speed bumps because one theme that I’ve been pushing is “Trump bumps.” In the past few years, we had a predictable kind of political environment, but now we’re moving into a political environment that’s much more turbulent and is going to feature, in my opinion, more of the turbulence that I’m characterizing as Trump bumps. 

But let me answer your question, Andrew, because I totally went off track. The employment report was strong—above 250,000. Steve Sosnick, we mentioned you in the Twitter live at around 36 minutes. 

Steve and I have been using our collective decades of experience every week. We look to the IBKR Forecast Trader market to see if there’s a possible trade or odds that we like, and then we publish that via LinkedIn and Twitter. So we did call out the 29 cents above on the 230,000 nonfarm payrolls. That turned out to be correct. The number came in at 256,000. 

Way to go, Steve Sosnick. 

Steve Sosnick 

I mean, Jose, but we did have to agonize over that one a little bit because there weren’t a lot of situations that really screamed out at us as having better risk-reward. And of course, I’m saying risk-reward because when we do these, it’s all about odds. It’s about probability, not certainty. And we thought the market might be undervaluing the probability of an upside surprise. 

Every so often, a blind chicken picks up a piece of corn! 

Andrew Wilkinson 

That’s right. That’s right. So, Jose, keep going. Was it a genuinely strong report, do you think? 

Jose Torres 

It was a strong report. Real quick, just one more thing on the Forecast Trader. It’s getting harder for Steve and me to find that edge. And that’s a terrific thing. We have more liquidity, more participants, right? They’re moving the odds one way or the other. So the tougher it gets for Torres and Sosnick, the better it is for our markets. 

We encourage you all to engage in our IBKR Forecast Trader market. 

Back to the report. Education and health services were the strongest collective, with government adding roughly 40 % of the total. So we’re still seeing the non-cyclical tilt. Corporates are hiring. They’re not going crazy hiring some months; they’re ramping up. Other months, they’re taking it easy. 

But generally speaking, there has been an expectation of pro-growth, pro-business policies from the new administration. Companies have, post-election, shed that election overhang. That uncertainty is past. So I’m expecting a reacceleration in the jobs market. 

We saw that in the report, and we’re seeing that in yields. Steve Sosnick alluded to that earlier—loftier long-end, heavier growth expectations, uncertainty about inflation, goods, and immigration, right? 

Goods drove the whole disinflation train from 2022 to now. If goods inflation reignites, just a little bit, all of a sudden, you’re in a 3.5–4 % inflation regime. Services have never cooperated. I don’t expect services inflation to come down. 

As far as equities, they can probably do well with inflation at 3.2 %, 3.1 % with a central bank that tolerates that. However, once you get closer to 4 % on CPI, equities are going to have a lot of trouble. 

I don’t think anyone’s ready for a 4 handle on CPI in the next 6 to 12 months. If the CPI goes to a 4 handle, Steve, I think the 10-year goes to 5.3 %, 5.4 %. And we’ll have to pare back some of those gains from the last two years. 

Or earnings prowess is unbelievable, and valuations can stay at roughly 21–22 times. If earnings can grow broadly across the market 10–15 %, then maybe you can get 10–15 % gains this year in a high-rate regime. 

Post-pandemic, the Fed enjoyed the train from 2008 to 2020 of just keeping rates so low and keeping liquidity so abundant. Post-pandemic, we’re in a new regime. 

Steve Sosnick 

One thing that I might point out, though, is the market’s already expecting 15 % earnings growth. That’s the problem. Broadly speaking, bottom-up, top-down, S&P 500 earnings are expected to go up by about 15 %. That’s a high bar. And that’s okay. 

If we do it, then the market—sure, that can rally. But the point being, you have to believe at least a good portion of that is priced in. And as we get into earnings season, which begins later this week when JP Morgan rings the opening bell, so to speak, it’s going to be very much about guidance. 

Because any whiff that companies can’t produce those earnings that are expected—these companies have been getting punished. 

If they do it collectively, the market gets punished. Look today. One of the reasons is Apple sold fewer iPhones than expected. And that’s not good. 

And if you have Apple leading the charge to the downside, it’s very hard for the markets to say, “Let’s buy that Friday dip,” because there’s some genuine bad news out there. 

Steve Sosnick 

Andrew, I may rip up the script. I know you have another question, but this one I think is very timely and it’s something I was wrestling with all weekend. What do you see, Jose, as the inflationary impacts of the fire in California? 

Let me not minimize that—I think it’s terrible in terms of the human cost, etc. But these things are going to have to be rebuilt. It’s going to put pressure on labor, on building supplies, etc. Do you see this being inflationary or not? This was something I was really wrestling with. 

Jose Torres 

Overall, climate calamities are inflationary. They push up the prices of things, especially when people start getting desperate. Unfortunately, we’re hearing folks are getting desperate for short-term rentals in the area. 

Of course, that creates a rush, similar to the equity market, Steve, that we see sometimes, that drives costs higher. Tough to estimate right now, Steve, especially because I just reported on Thursday that the damages economically were $55 billion. Now they’re up to $150 billion. 

Steve Sosnick 

I heard an estimate of $250 billion this morning. 

Andrew Wilkinson 

That’s what I heard. 

Steve Sosnick 

Just keeps going up. And by the way, a lot of those cars. One of the things that had been helping inflation was some easing of car prices, and this is not going to help that because you live in California. You need a car. 

Andrew Wilkinson 

I think we’ll be using the word “trillion” before too long. 

Steve Sosnick 

Oh god, no. But yeah. Goodness, no, but yes. 

Andrew Wilkinson 

It’s going to happen. It’s going to happen. 

Jose Torres 

Just tilting to the other inflationary aspects. We spoke about the goods, but then on labor—we have labor scarcity in this country. Post-pandemic, it got even worse. 

When I was at the Department of Labor between 2016 and 2018, a common discussion was always, Jose, how are we going to bridge the gap in job openings and the unemployed? Right? Companies want these kinds of workers. They can’t find them in the pool of unemployed folks. That was before the pandemic, Andrew and Steve. That was before the pandemic. Now a lot of people in their 50s, they have several investment portfolios. Several real estate properties. 

A lot of them retired, right? You had the immigration effects of President Trump 1.0 and now President Trump 2.0. We’re going to have a lot of those similar dynamics, right? He’s an immigration hawk. 

Some folks are going to voluntarily return back where they came from. Other folks—there’s going to be some enforcement actions. 

So that kind of environment weighs on labor supply and drives up costs. 

Like I said, a 4 handle on CPI is a possibility. We don’t want to see that, ladies and gentlemen. The best case here is non-inflationary growth. We get economic growth, earnings growth, no inflation. 

We can live with a 10-year right around 5 % if earnings growth is great and everything works out. That’s the best case. Acquiescence from trade partners as well. 

Andrew Wilkinson 

Steve, you said you wrestled with this concept over the weekend. I can see all the inflation, but maybe you’ve got some thoughts on where it could potentially be deflationary? 

Steve Sosnick 

Deflationary? Offhand, you’ve had a lot of wealth destruction, so in that sense, it could be deflationary, in the sense that, unfortunately, people whose insurance doesn’t cover their losses could be deflationary because they just won’t have the spending power. 

There will be people who have inadequate insurance and won’t be able to rebuild. Who might be underwater on their mortgages and just say to the banks, “Here, have this piece of property, do what you will with it.” That definitely can have a deflationary effect too. 

I think the problem is the inflationary effects are, and again, really should be more of a Jose question because this is economic, but I see where the inflationary effects are first order and the deflationary effects in some ways are second order. 

Does that make sense to you, Jose? 

Jose Torres 

Absolutely. The bar for deflation here is through the roof. We’re in an environment that’s abundant in liquidity and we have a lot of inflationary factors. 

The wildfires are isolated to Los Angeles County, which of course is a huge county in the United States, but the United States is massive—sea to shining sea. Consider all the gateway cities and all the other things. 

So I’m confident saying that there’s no deflationary impact on the overall economy from this isolated incident. 

Andrew Wilkinson 

Great. Jose Torres, Chief Economist at Interactive Brokers, and Steve Sosnick, Chief Market Strategist. Thank you for your thoughts today, and we’ll catch you later in the week on Reddit. Jose, we’re going to talk about the Consumer Price Index as it’s unraveling. 

Jose Torres 

Yes, sir. We’re going to talk about Steve as well. We always have to mention Steve in those live events. 

Steve Sosnick 

No, you don’t. It’s not in your contract. It doesn’t have to come up. 

Jose Torres 

You haven’t seen it. You haven’t seen the contract. 

Steve Sosnick 

Okay. Fair. 

Andrew Wilkinson 

Thank you very much, gentlemen, and we’ll catch up with you later next week. 

Steve Sosnick 

Okay. Take care, everybody. Bye. 

Andrew Wilkinson 

Thanks. Bye-bye. 

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