What are some of the economic, geopolitical and tech-based factors driving market trends this January? Nicole Cox and Linda O'Bryon speak with Wall Street Journal investing columnist Spencer Jakab for a deep-dive into the stock market outlook in 2026 and what investors can anticipate.
Full Transcript:
Nicole Cox: Americans are processing a variety of economic news reports as experts offer opinions on where we are at in the first quarter of 2026 and what this could mean for the rest of the year. The Bureau of Labor Statistics reports at-home food prices increased 2.4% last year over the year before. GasBuddy predicts the average nationwide gas price is expected to fall in 2026 to the lowest level since 2020. And the National Association of Realtors projects an improvement in housing affordability in 2026. Hello, I'm Nicole Cox.
Linda O’Bryon: And I'm Linda O'Bryon. Thank you for joining us for Navigating Our Financial Times. Threats of tariffs against European and other allies, worries about foreign investors backing away from the U.S. Treasury market, a sell-off in Japanese government bonds, and concern over possible political interference with the independence of the Federal Reserve are contributing to recent volatility as speculators wonder what lies ahead for investors in 2026.
NC: And if Wall Street and Main Street run in parallel and don't intersect, what should people consider if facing financial crossroads, wondering if they should proceed with caution, yield, or stop?
LO: Joining us today to offer some insight on both streets, no matter what direction you are heading, is journalist Spencer Jakab, investing columnist at The Wall Street Journal who writes the daily Markets A.M. newsletter. Before he was a journalist, he was a top-rated equity analyst at Credit Suisse, and he has authored two books, "Heads I Win, Tails I Win," and "The Revolution That Wasn't." Thank you for joining us, Spencer.
Spencer Jakab: Hey, thanks for having me.
LO: Spencer, your Markets A.M. newsletter of January 21st of this year examines the links between the stock market and the overall economy. If the stock market isn't the economy and they don't intersect, can you explain the codependent relationship that exists that you describe as being somewhat nasty at times?
SJ: Yeah, I mean, people often make the mistake of drawing inferences about the economy from the stock market, and they're two separate things. The stock market represents the very big companies, not the barbershop in the corner, not the restaurant in town, and so it's not the same businesses. And its movements up and down sometimes don't even reflect the underlying profits very well of those companies.
But at times, they do affect one another a lot, and this might be one of those times. I mean, the US is unique in the sense that we really have to be, provide our own pensions, be our little fund managers with our 401(k)s and our brokerage accounts. And at extremes, that really does affect behavior. When the stock market has a big crash, then people tend to tighten their belts a lot because they're worried about ever being able to retire. Not that they were spending money actively out of their brokerage accounts unless they were retirees with too much money in stocks. And then at times like today, with stocks hitting records most days, it's the opposite. Stocks tend to give us a wealth effect and to translate into the real economy. And that is actually more the case today than it might ever have been in American history because it's the well-to-do who are really providing the lion's share of spending growth. Half of all consumer spending now is coming from the top 10% by income and also by wealth.
LO: But what about also ownership in the stock market? More people are in the market because of 401(k)s. Is that true?
SJ: They are. Yeah. It's almost never been so broad. So more people are in the market. But if you're 26 years old and you just started putting a couple of thousand dollars a year into the stock market, surely you're pleased if the market's a little bit higher than a little bit lower. That’s money you're putting away for the future. It might impact your mood, but it doesn't affect your spending very much. If you're, let's say you're the 95th percentile in terms of wealth and incomes. Someone in the, you know, not rich enough that you've heard about them: not private jet rich, but a rich person you might even know in your neighborhood. Not professional athlete, but someone who can afford a second home, a very nice car. They're going to be affected by it. And today, not only is stock market wealth concentrated in that top 10% more than it is in the other 90%, even though they happen to be in the stock market more than they used to be. But their spending is influenced by it too. Even if they're not selling stocks, even if they're not living off of the dividends, they'll look at that statement at the end of the month. And if there's a big minus from month to month, it'll affect their spending. And if it's going up a lot, then they're more confident about their spending.
NC: And speaking of consumer spending, is that a good example of, you know, the retail sector is where this codependent relationship kind of connects, where if spending is up and then, you know, the earnings releases are affected if they're up or down?
SJ: Absolutely. And there are a lot of ways that you can tell. It's not just the overall amount of spending. I mean, we do have a rough idea of how much money people spend. You're not going to spend 50 times as much on food at home if you are 50 times wealthier. There are limits to what you're going to spend on. You're not going to buy 50 pairs as many of underwear. I don't think you will. But you're going to spend on things like high end vacations. You're going to shop at certain stores and not other stores. Just looking at where money is being spent. Let's say look at hotel chains look at what sort of hotel chains are seeing booming business and what sorts are not. What kind of vacation destinations are seeing more people? What kinds are seeing fewer people? Which stores and which restaurants are seeing pretty good business and so-so business? And there's more ways to slice it than that. For example, right now a parallel thing you're seeing is young college graduates feeling strained too. People who would be coming out of college who usually would be pretty free-spending. They were sort helping to hold things up until a year, a year and a half ago. You're talking about 22-to-26-year-old people with college degrees. Now they're having a much more difficult time finding jobs because of AI and other things. Hiring has really slowed down in those white collar areas. And so they're pulling back too. And you can definitely see that in businesses like Chipotle and things like that, that cohort favors as well. But I guess what I'm talking about is you see there are many signals in the economy that show that wealthy people are spending pretty freely and middle class people are at least tapping on the brakes.
LO: But you know what I find ironic, Spencer, is that companies like Saks Global are in bankruptcy right now. And here's, you know, that represents Neiman Marcus and Saks and Bergdorf. What's happened there? Why haven't they been able to participate in this boom at the upper end?
SJ: There are a lot of idiosyncratic things. If you look until very recently at sellers of luxury goods: LVMH, Birkin bags, which cost $50,000—those have been flying off the shelves—Rolex watches. Saks is a bit of a special case because a lot of these luxury businesses that were seen as so promising that private equity came in and really leveraged them up and then things just didn't go as well as they expected. You can't draw an inference from one or two businesses. If you look at a category as a whole: luxury goods or high end hotels or business jets, private jets, golf course memberships, things like that. The wealthy are doing just fine. They feel good about themselves because their homes are valuable and they do own homes, only about two-thirds of Americans own homes, not quite. They're much more likely to own homes that have appreciated in value. So that's on their ledger, and then stocks. Again, you don't have to be spending that money. It's just how you feel about the money that's there. As a matter of fact, the very wealthy, which I'm not talking about them because they're really almost unaffected by economic cycles. You're not going to cancel that yacht order if you're a billionaire just because the stock market went down. Those people even have to spend their wealth either because they don't want to ever realize a gain. They basically borrow against that immense wealth. I'm talking about people up to the 99th percentile, people who are very well-to-do but not the out-of-sight rich.
LO: Is there another time in history that comes to mind that matches what this economy is experiencing?
SJ: here have been times when the wealth effect has really carried spending. But in history, I think it doesn't repeat. It just rhymes. If you look at, for example, the housing bubble. People were literally spending their wealth during that period because it was very easy to refinance and then keep on taking equity out of your home. So you had a couple of trillion dollars of spending that was tied directly to home equity being extracted and spent like an ATM. That's not something we're seeing now. As a matter of fact, we’re seeing the opposite because it's actually expensive to do it. During the dot-com boom, you also saw a related wealth effect, not as concentrated because wealth wasn't quite as concentrated a quarter century ago as it is today. Anecdotally, you saw it in the late 1920s, but then you had an even narrower slice of people who were playing the market. So, you have seen it from time to time, but it's in some ways more extreme than it ever has been, more concentrated for sure than it ever has been. And f you look at the size of the stock market relative to the economy, it is larger than it ever has been. It's about 220% of the size of GDP. Think about that. There are some really big companies that aren't on the stock market. That's never been the case either. You have OpenAI, which is a massive company on paper. Or SpaceX, and companies like that that are enormous that you and I can't invest in directly.
LO: Well, the three that you mentioned, the dot-com, the housing bubble, the 1920s all resulted in a crash of some sort, some worse than others. Does the fact that there are more people invested, and the other factors you've mentioned, change your feeling about what might happen to this market after all of this strong economy that we're seeing?
SJ: I mean, yes. The study of bubbles is a really imprecise thing, there are a lot of people who say that we're in a bubble today. Let's take the closest period to us, the most analogous period, and that was the late 1990s when you had internet-related stocks and telecommunications-related stocks really taking off and people felt very wealthy and you had this national obsession with the stock market. In some ways, that was more extreme in terms of how interested people were. I certainly remember my mom and her friends were glued to CNBC. My mom, who’d never, like, had never watched TV, and then was telling me about stocks that I had only vaguely heard of. At that time I was an analyst at an investment bank running an emerging markets research team and her friends would pepper me with questions about this stuff. And it didn't matter. I was very cautious about it, and I urged them to be cautious about it, and they didn't want to hear it. People don't want to hear it. When people all of a sudden with no finance background are turning around and telling you like a killing they made in Lucent, even though they don't know what Lucent did, then it's like a real sign of the apocalypse. I don't feel like we're quite there yet where everyone is asking me questions and things like that. Again, that's just a feeling. That's not a number. We might be in 1997 or 1998, you know, rather than late 1999, early 2000 in terms of the level of euphoria. It doesn't have to repeat the same way. The fact that the stock market has done very, very well, this AI stuff has to work. It's all really being bet on one technology. We've all toyed with ChatGPT or some AI model and been really impressed. I certainly have been, in terms of what it can do. It's amazing. I think electricity was pretty amazing too. I think railroads were pretty amazing. I think the Internet was pretty amazing. I'm really not qualified to pass judgment on whether this is bigger than fire. Maybe it'll be more transformative, maybe it won't. It's certainly important, but the impressiveness of the technology is separate from the investment performance of the theme in the stock market. Had you invested in cars or airplanes or electricity or real railroads at the outset and tried to pick the winners, very few of the initial companies that really were big would have done well. More money was lost than created by individuals. People who jumped on the bandwagon tended not to do great. That's a cautionary thing that I would throw out there. Not to say the stocks are about to crash or that all of these stocks will do poorly, but there's definitely a bit of froth in the market at the very least. But I wouldn't go so far as to say it's definitely a bubble because we will only know in hindsight.
NC: I think it's really funny when you mentioned that story about your mother's friends asking you and how people who don't know anything about it are, you know, acting like they can make these decisions. It reminds me of a series I was just watching that talked about Joseph Kennedy before he became SEC chairman. He said, "When I'm getting investment advice from the shoeshine boy, I know it's time for me to step back from the markets." [laughter]
SJ: That's right. And at that time, I would get in a taxi and people would see me wearing a suit or something that indicated that I worked in the investing business. They'd start asking me questions. That's a bad sign. That's not a good sign at all. Just how much people want to talk about it. I felt people were talking about housing a lot. I don't live in one of the hot housing areas, either. In 2005, 2006, I remember people even here saying, "Hey, my neighbor's house sold, and he sold it for so much money. Isn't that great?” Like—are you going to sell your house? No. Is your family going to live in a yurt? You know, unless you were going to take money out and spend it, which turned out not to be a great idea, people were irrationally happy about that stuff too. People behave in really funny but predictable ways when things get frothy.
NC: In your January 23, 2026 Wall Street Journal article, “How Electoral Cycles Feed into Market Moves,” you discuss the strong average return seen in recent decades for the S&P 500 in the third year of a presidential term. At the time of this taping, the S&P 500 hit 7,000 for the first time, breaking another record. Meanwhile, gains during the second year of the cycle, which we're in now, are weak. What are some of the reasons for this? And could recent volatility impact the cycle in a greater or different way?
SJ: Yeah, so there is a really compelling presidential cycle. People will point to things like the Super Bowl indicator: Did an old AFL or NFL team win the Super Bowl? There are all kinds of spurious things out there. This one isn't because the president happens to have a little bit of say over what happens in the economy, when money gets spent, when decisions get made, when bad news gets delivered. And so the typical pattern is that the best year of a presidential cycle is as they're gearing up for reelection, which is the third year. Then the fourth year is the next best, the year of the election itself. The first year is okay and the second year tends to be the poorest. However, when a president is in his—and I'll use the word his because there only have been men so far—when a president is in his second full year, which is this year, but it's also his second term. He's not going to be reelected. He's concerned about midterms. Then the market actually does tend to do quite well. So that's stimulus or whatever decisions are front-loaded. That definitely is the case this year. If you look at the one—I keep forgetting how many B's there are, the OBBBA, the tax bill—passed last year, the tax overhaul, it is very front loaded.
At the beginning of this year, not only are people benefiting from a variety of tax cuts that are feeding through in terms of withholdings, but they're withholdings back because they're retroactive. They're getting withholdings back have been taken last year. Basically, they're getting bigger refunds they usually did. And a lot of those refunds are going to people who are legitimately middle class, so people are more likely to spend it. Usually, when you give a tax break to very wealthy people, they're happy about it and they go and save it. If you give a tax break or send a stimulus check to people who are middle or lower-middle class, they're much more likely to go out and spend it immediately than to save it. And a lot of these savings have to be going to that group at the beginning of this year. They're going to get bigger refunds, plus the tax cuts, plus some corporate tax rules that are really encouraging companies to spend a lot in terms of capital expenditures this year because they can expense them immediately. So all those things combined make this a pretty stimulative year. And that's before we're talking about possibly further Fed interest rate cuts.
LO: Spencer, you talked about the ‘Super Bowl Effect.’ Another one we hear about is the ‘January Effect’ or indicator that so goes January, so goes the rest of the year, especially among small cap stocks. Is there any truth to the January Effect? And if so, what does this January mean for the rest of the year?
SJ: Yep, there is. That's a really interesting one. Actually, there are two. So the two that people tend to overlap a little bit. There's the January Effect and the ‘January Barometer.’ The January Effect is that at the end of a year, people tend to go through their stocks and sell the losers, and fund managers do, too. They tend to sell their losers so they can take a tax loss. Then those stocks tend to look a little bit bombed out, and especially smaller stocks. And then people reallocate at the beginning of the year. And so, stocks that are beaten up, and then especially smaller capitalization stocks, tend to have a pretty good January. It doesn't last usually, but they tend to have a pretty good January. Small capitalization stocks actually right now are fairly cheap compared to the very large companies dominated by the Magnificent Seven. So that's actually not a terrible idea if you're a long-term patient investor to look at what you own and make sure you own the entire stock market, not just the largest stocks. There's some good value there. The January Barometer is a different but related one where people say, If it's a good January, then it tends to be a good rest of the year. More than three-quarters of the cases, a good January carries over to the rest of the year. Now that’s, maybe that's not so surprising because if you're in a bear market, then January is not that great, and then the rest of the year might not be that great either. But definitely, there has been a kind of tone-setting that January has done for the rest of the year and, yeah, it’ll be a few more days. We shall see, although I think that this will air—it’ll already be in the history books, but it's okay. Not a blowout month, but looks like we'll end it in the green.
NC: Well, speaking of the Magnificent Seven stocks, the high-performing stocks: Alphabet, Amazon, Apple, Tesla, Meta Platforms, Microsoft, Nvidia. By the way, at the time of this taping, Nvidia, the most valuable company in the world. Why do these stocks dominate? And what will happen to the overall market if a few of them falter in their performance?
SJ: Yeah, it is highly unusual. If you look at those seven stocks, they make up more than one-third of the value of the Standard and Poor’s 500. Then if you look at US stocks, because it's a big world out there, right? The US is, what, 4% of the global population? It's less than a quarter of the world's gross domestic product. US stocks dominated by that group, as I said, make up about two-thirds of the world's market cap. So the world is invested in those stocks too, because whereas Americans might not always be that interested in investing in, say, Japanese or German or Brazilian stocks—they have pretty low allocation to stocks outside the US. People in those countries have a big allocation to stocks in the US and really have kind of ridden this bull market with American investors. So that level of concentration is usually concerning. You have had a handful of other times that the market has been this concentrated. Again, a handful of examples, there's nothing scientific about it, but that usually has preceded a come down for the market overall. One of those periods was the early 1970s when you had stocks called the Nifty Fifty. There are different lists of what people think were those stocks. It was a list put out by Kidder Peabody. Basically 50 stocks that didn't matter how expensive they got. They're such good companies that you kind of had to own them. Most of them were not tech stocks. You had things like Polaroid and Kodak in there, McDonald's, Philip Morris, various companies like that. A lot of companies that are good blue chip companies, but they got so expensive compared to everything else. Then when they came down, they made up so much of the market that they dragged the entire market down with them. That's certainly the danger today, especially since all the companies you mentioned, the Mag7, have some connection to the wonder technology of the day, which is AI. Nvidia most of all, because Nvidia is like the arms dealer there. They're selling the chips that everyone's trying to get as many as they can of to power these data centers. All of those companies to a greater or lesser extent are tied to this AI theme, even Tesla.
NC: And plus, it was just announced this week, the last week of January, Amazon announced job cuts of 16,000 staffers globally.
SJ: Right, citing AI.
LO: Spencer, what are some other stocks that are on your radar screen, especially in the coming year and why?
SJ: Well, we're discussing Magnificent Seven. If you really, if you broaden it out, there are a lot of companies that most of which you've heard of, not all of them, that are riding the coattails of that theme. Depending on whose list or what you include, there are about 40 to 45 AI-related companies in the market now. If you look at those companies, and this is something I also wrote about recently in the Markets A.M. newsletter, those 45 or so companies make up more than two-thirds of all investment since ChatGPT was launched in November 2022. They make up more than two-thirds of all profits earned the stock market, in the US stock market. They make up more than two-thirds of gains, price gains in the stock market. They all have some AI flavor to them. This is broader than just those Magnificent Seven stocks.
So those are companies like AMD, like Micron, and then they're companies that are not strictly speaking tech companies, but like Vistra, which is a power provider that has nuclear exposure or GE Vernova, which makes gas turbines because there's like a three-to-four-year backlog. They can basically name their price to supply a gas turbine because there's such intense power needs for the data centers being built to harness AI. So that's also an AI-related stock now. You never thought of it that way, but it is today.
Even something that's not on this list, but Caterpillar, Caterpillar that makes those tractors and construction machines, well, there's so much construction going on of data centers right now that Caterpillar is a hot stock.
But then there are other companies, surprisingly, that are really sagging also because of AI. One of them, a really hot theme of the last several years, was so-called SAAS stocks, which is ‘software as a service.’ You know, you used to buy a copy of Microsoft Office and have it for 10 years and then buy another in a box, in a store, or order it on Amazon. And now all these things—and corporate applications especially—are delivered through the cloud as a subscription model. Those software companies like Salesforce and people like that were really riding high. Now a lot of those companies are being hurt because it is actually becoming so easy to write code with AI that they're being undercut by this AI technology. So it’s sort of a dog-eat-dog world in technology because people see them as not as going extinct, but definitely facing an existential crisis because of AI.
NC: You’re listening to Navigating Our Financial Times. I’m Nicole Cox.
LO: And I’m Linda O’Bryon. We’re speaking with Spencer Jakab, investing columnist at Th Wall Street Journal who writes the Markets A.M. newsletter. Spencer, you've talked about how the share of US household financial wealth derived from stocks has never been so high, in what you describe as the US love affair with stock investing. What do the risks that Americans are taking to achieve these economic gains tell us about economic trends today, and what could happen if there's a shift or a slump?
SJ: The problem that we have in this country is that we don't have—it’s not like France where you can just count on a juicy pension and live pretty well and you have nationalized healthcare. So we have to invest in the stock market. It's not a bad thing at all. I encourage, especially any young person to save and to invest in stocks and it's a great way to multiply your wealth over the long run. But of course there are dangers too and especially if you really need the money, if you're getting closer to retirement day and there's a big downturn in the market then it can be devastating. It has been in the past. We've seen that in the last two major bear markets, the really long bear markets. I'm not talking about COVID, which was over in an instant, but in the one from 2007 to 2009 and the tech crash, a lot of people were devastated because they had kind of extrapolated what was happening into the future and took overly large risks. But what we're also seeing, which is really interesting, and this is driving a lot of turnover in the market, but it's not a lot of the wealth in the market, is mainly young people and mainly men between the ages of 18 and 35 becoming very active to the extent that they make up in some segments of the market a very large part of the turnover. And that's a different phenomenon entirely. That's a new thing. This used to be a generation that it was very hard to get them interested in the stock market. Now you can't get them away from the stock market, when they're not doing sports gambling or prediction markets. And they're doing it in very risky ways. I spent a year writing a book about the GameStop Mania, which just hit its fifth anniversary. That was just the kind of peak of a trend that had been building up in the year, year and a half before that and has gotten, if anything, more intense since then in terms of people betting on things like short-dated, risky options on stocks, like real lottery ticket type investments. Crypto, and then of course, literal gambling: casino and gaming and sports betting, which also have exploded since being legalized. You have it right there on your phone. And not coincidentally, if you look at some of the brokerage apps and some of the gambling apps, they are almost indistinguishable on your phone and that's no accident. There's a very conscious design choice in terms of how frictionless they are. The colors, the fonts, the confetti, the way that they kind of trigger the dopamine in your brain. A lot of the addictive behaviors are very similar between the two. And so there are corners of the stock market that are definitely affected and dominated really by that cohort. Even though they don't have a lot of money, they trade so actively that they have an outsized influence on those parts of the market.
NC: So do you think some of the cause for this is more of how people are being pulled into the new designs and with things being created to keep people for longer, or ‘oh, it's just a game, you're not really losing money’ with the gamification of apps, or is it something about, well, my retirement plan is to win the lottery. I mean, is it a balance of both? What do you find is part of that cause?
SJ: Yeah, Nicole, it's a combination of all the things that you mentioned. You shouldn't look at any demographic as a monolith because there are some people who just assume that this is the way you invest. You know, if you're 24 years old today, where are you going to get your advice? You're very likely going to get it from an online influencer instead of some guy in a suit who your dad knows. A lot of the advice you have that you take as being perfectly serious is some guy saying, "Do this, invest this way, be very, very active," things like that. As they're concerned, it's earnest good advice on how to build wealth. But we know, and there's no doubt about this, there have been multiple studies that the more active you are as an investor, the less you earn. There's an inverse correlation, a very clear, sharp, inverse correlation between activity and returns. So that's not a good idea, obviously. But there are people there who are saying, "I can't get ahead. I have student loans. I'm never going to own a house." There's this desperation where it’s like, "I'm going to roll the dice."
LO: So despite all this activity in the stock market and other markets, gold and silver prices have been soaring. And yet gold and silver was always thought to be a flight to safe haven. How are we seeing this at these two distinct markets?
SJ: Yes, gold and silver are both through the roof, and they are perceived as a safe haven. So that, again, is I think a different trend. There's a rising level of distrust in the classic safe haven, what has been the safe haven asset since World War II, which is the dollar and US Treasuries. There's a sense in other countries and in other countries that there's a sense of in other countries and by some people in this country that there's a level of amateurishness in the administration, that there's not a commitment to deals, that a lot of the institutions like NATO and free trade agreements are not being honored or not being valued. And so the US is no longer as reliable a place. There's even been some discussion by Stephen Miran who Trump appointed to the Fed before Trump entered office, he wrote a paper saying maybe what we should do is force foreigners to convert their short dated investments on a treasury market to much longer term investments and kind of cram them down, which is like defaulting on your debt. So it's like a kind of a, I would say whatever you want about the idea, but then all of a sudden he's a Fed governor now. So he hasn't spoken about it recently, but it's kind of a dangerous thing to have out there. You’ve had very contradictory statements. So gold and silver are classic safe havens because they're no one's liability. Gold and silver, you have a gold coin in your drawer, or if you own a mutual fund that owns gold, no one can devalue that. It's immutable. They're the two, they're kind of ancient money. And Keynes, the economist, called gold the barbarous relic for that reason. It doesn't pay interest. It hasn't been a super duper attractive investment in the long run, but whenever there's concern about money losing its value, inflation, what have you, those two have been the go-tos and they are now. And interestingly, crypto has not been. Cryptocurrency, which is described as digital gold has acted in the opposite way. So when there's a lot of speculative fever, then they tend to do well. And then when there's a big sell off in the market, something like Liberation Day or the Greenland incident recently, they've fallen back. So people have not embraced them in the same way as a matter of fact, quite the opposite.
LO: So it's almost as though that gold and silver are safe haven, but not for the stock market, more toward a dollar decline or toward these global issues—tariffs, trade—that people are worried about. Is that your sense?
SJ: Exactly. And then if you're concerned about the US running very, very large deficits or, or let's say like at some point in the future, losing control of this because we are, you know, the red ink as far as the eye can see, and you only have two choices. You can either invest in stocks or you can invest in treasury bonds. Well, stocks are the lesser of two evils. So stocks actually can do, you know, the most recent period of very high inflation we had with prolonged high inflation in the 1970s, stocks did abysmally. But that doesn't mean that it has to be that way because other countries, other times when there had been high inflation, stocks actually did okay. They were kind of like a refuge because you're owning part of a company. A company can raise prices. A company has debts that, you know, get eroded by inflation. So stocks are kind of a safe haven during inflationary times too. And so it's not contradictory to say the stock market's doing well, but gold and silver are at records.
NC: During the first half of the program we mentioned, we talked a little bit about AI. Microsoft has rolled out its next generation of AI chips to reduce reliance on processors by NVIDIA and AMD. This is probably a bit out there, but is there any basis of comparison, a time in history we can look back on, to help predict how AI will impact jobs in the economy, say within the next five years, or is this just too unique and moving too fast?
SJ: You know, I have to say that think about it all the time because I have a son in college who’s studying computer science. I also have a son who's early in the workforce, also a computer scientist. You can definitely see it in their industry, in their cohort, that jobs are being affected. Jobs that are at more entry-level especially are being affected. You know, if you look at the unemployment rate, for example, among college educated people in their 50s, it's pretty steady over these years. But the unemployment rate of college educated people between the ages of 24 and 30 has risen substantially to the point that it's now on par with the younger, rather the same cohort who only have a high school education. You know, usually they're much more employable. And so a lot of entry level things are being affected. Dario Amodei, who's the head of Anthropic, who's predicted that a third of white collar jobs are going to be gone because of AI. You know, you can have a law degree, but you're doing pretty menial stuff when you start working at a law firm like document review. Well, you know, AI is pretty good at reviewing documents. AI might not have the judgment to, you know, it's not going to go argue a case in front of the Supreme Court, but it's going to do something on the lower rungs of that profession. And we are seeing that. Difficult to say where that's going to all shake out, because like, look, all these technologies that have developed over the years, people said it was fine. You know, electricity was invented and steam power and railroads and things like that. You know, you don't see an elevator operator anymore these days, whereas when I was a little kid, you still saw them from time to time here in New York City. You know, that was someone's job, you know, turning a crank and pushing a button and telling you where to go. And now it's obviously, it's all done by a little computer inside that Otis elevator or whatever. Technology is always kind of destroying some roles and then creating new ones. And we don't all seem to be unemployed. Maybe this is different. It's definitely unpleasant if your job specifically is as affected or your sector specifically is made redundant by a new technology. But in terms of what it does in the long run for society, it's just too difficult to say. Hopefully, the benefits of the productivity that AI brings us will outweigh the short term pain that some people are feeling.
LO: Getting back to some of these geopolitical issues, news stories about political interference and the importance of an independent Federal Reserve frequently include how the Fed uses interest rates as a tool to influence inflation, generally trying to bring it down. Can you review the opposing perspectives on inflation that exist between Main Street and Wall Street?
SJ: Yeah. The Fed actually has what's called or has had since the late 1970s, it's called a dual mandate. Those are sometimes contradictory. So full employment, which is not defined, but basically as many people as practical having jobs before it causes very high inflation and controlling inflation, so protecting the value of the currency. When it's concerned about job losses at the time or future job losses, then it tends to sometimes err on the side of tolerating a bit of inflation, letting the economy run hot. That's what it's been doing now. Of course, there's also a great deal, unprecedented political pressure on the Federal Reserve where you have indictments and basically using the criminal justice system. Obviously this is denied, but it's very obvious that the criminal justice system is being used as a tool to pressure people who sit on the Federal Reserve Board to leave and create vacancies for people who are going to be more amenable to cutting rates. And President Trump has been very clear about where he wants rates. It's not like this is the first time there's pressure on the Fed. It's just never been done in quite this compressed away, in this so obvious a way. There was pressure on the Fed in the late 1960s. I think President Johnson it was who shoved the Federal Reserve against the wall during a meeting. President Nixon put pressure on the Fed. The Fed basically engaged and kept rates artificially low during and in the years after World War II in order to help the United States government pay for the war basically. Rates were very much artificially low. It hurt savers and it hurt consumers at the time, but those gigantic debts had to be brought down somehow. So it's not the first time that the Fed has been there. They're not lily white in terms of their protection of the currency. And you know, the Fed only has existed since 1913, so that's not that long of a time either. So this is different, but it's not the first time that they've been put under pressure. The aftermath, I'll tell you though, of the 1960s pressure on the Fed was that they were seen as having been too lax and you had the great inflation in the 1970s. That was only brought under control when Paul Volcker was appointed Chairman of the Fed by Jimmy Carter, to his credit, because he basically told him what he was going to do. He just destroyed the economy. He spurred not one, but two recessions, probably cost him reelection if he was going to be reelected. But that was what it took to break the back of that 1970s inflation.
So let us hope that we don't get to that point where you have to have this real austerity to bring inflation back under control one day, but playing with fire a little bit in terms of being so loose today.
LO: Well, does the Fed still have the clout then that it once had given not just the pressures from the administration, but also Congress spending more?
SJ: Well, so you’ve had various Fed Chairmen over the years make comments. It's not their job. They can say whatever they want, but they can't control it. Point to runaway fiscal deficits. Today, not only do you have more debt than we've ever had, relative to the size of the economy and certainly in absolute dollar terms, but you also have a record fiscal deficit for an expansion. You've never had a fiscal deficit of 6%, almost 7% of gross domestic product during an economic expansion. You do that when the economy has just taken a hit, let's say from a pandemic or from a recession or what have you, and you need to get people back working again. You don't do it at times like this because if you're doing it, 6% GDP when times are good, then if you have a recession, then you'll have a blowout number and you'll never get it under control. That's a dangerous thing. It's not the Federal Reserve's job, but the two are related, right? Because the real fear is that you're going to have something eventually called fiscal dominance, which is what happened. I spoke about what happened during and after the Second World War. People don't talk about that very much anymore, but that was a period of fiscal dominance where basically the Treasury said "Hey, Fed, you need to keep rates at this level and not above, and don't let it rise above this level because otherwise there's no way that we can bear the borrowing costs needed to defeat fascism." And they did, and it worked, and then the US grew so quickly after World War II. It was the dominant economic power in the world that those deaths were paid down, interest rates normalized, and everything was okay. We didn't just defeat fascism. We didn't just do anything like that. We had COVID a few years ago. We spent a lot of money on that, but there's no emergency today. There’s a fear that, especially foreigners begin to get nervous about financing the growing pile of US debt, that the Fed will basically be forced to keep rates low because that’s the only thing that will keep spending in check because today, interest spending on the federal debt has just exceeded $1 trillion a year. A trillion dollars, not only used to be a lot of money, it's a lot of money today. That's more than the defense budget. It's more than all discretionary non-defense spending combined. And so, it's a very large amount of money. If you can force that interest rate down, you can help the government with this interest bill, but you're also making a pact with the devil in a way because, when can you raise rates again? That's the situation that Japan is facing today. There's a lot of anxiety because they have a far larger relative to their economy pile of government debt. Now that the Bank of Japan is raising rates, there are real fears about how the Japanese treasury is going to pay for all that as old bonds roll over and new ones are sold. That's a long, complicated topic, but that's a real concern. President Trump even has said the quiet part out loud about that, unfortunately, sort of suggesting that one reason that he wants low rates is that it'll help the budget. The two are supposed to be like church and state. They're supposed to be kept apart and the lines are blurring.
LO: So Spencer, where do we go from here?
SJ: Well, the market's going to open tomorrow and no matter what happens, we'll go on. It's a fascinating thing to write about the stock market. People get very emotionally invested in it, obviously, as opposed to being financially invested in it. It’s just an impossible thing to predict. You have some of the smartest people in the world applying all their brain power and lots of computing power to figuring out what's going to happen. And usually, the thing that you don't expect to happen is what winds up happening. What I always tell people is to take the longest possible perspective that they can. I know people who basically invested in something and literally forgot that they had invested in it for 25-plus years and then discovered it and were very, very happy. I don't recommend forgetting your password or forgetting that you made some substantial investment in the stock market, but I do recommend as much as possible behaving that way because even though it's my job to write a newsletter every single day for people who are interested in the stock market, I'd read it and then, maybe, lose the password to your brokerage account fora year and not worry about it. Those are the people who are the really successful investors of the ones who don't let the fear and the greed destroy their finances. It is just a place to invest and put your money and let it accumulate over the long run.
LO: Those are just great observations, thank you. For more insight from journalist Spencer Jakab, his Markets A.M. newsletter is published daily by The Wall Street Journal at wsj.com/newsletters/markets-am. Thank you for joining us today.
SJ: Hey, thank you for having me.
Thank you for listening to Navigating Our Financial Times. This program is not intended to provide investment, tax or financial advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. The views and opinions expressed by guests are their own and do not imply an endorsement or recommendation or necessarily reflect the views of AZPM.
