Brian Pietrangelo [00:00:00]

Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, February 6th, 2026. I'm Brian Pietrangelo, and welcome to the podcast. We've got a big weekend coming up for sports, and I'm sure most everybody knows the Super Bowl is going to be held on this Sunday. So it always attracts a lot of viewers, not only for the football, but also for the commercials. But also today, in case you missed it, it's the opening ceremony for the Olympics from Milan, Italy. So we're going to get a lot of entertainment there in terms of all the sports that are covered during the Winter Olympics. So again, tune in if you can. With that, I would like to introduce our panel of gold medal investing experts here to share their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealth, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor. Taking a look at this week's market and economic data, we've got three general updates for you and then a focus with four more updates on the employment and jobs market data. So on the general news, first we've got the government shutdown basically ended with about two days in lapsing in terms of getting the government back in order and also continuing some of the economic releases that were delayed a bit. Second, we continue to get Q4 earnings for companies in the S&P 500 and elsewhere, so we'll talk about that with Steve. And third, we've got the Institute for Supply Management readings on both the manufacturing side of the economy and the services side of the economy. On the services side, it has been an expansion for almost five years and continues to be so from the reading that came out in January, so that's good news. And on the other side of the economy, where there has been some dismal news in terms of the manufacturing, basically been in contraction for almost five years, January showed a sign of life where there was an expansionary month. So, we'll see if that continues here on the manufacturing side. Now let's move to a lot of data that we received this week related to the employment front, but we'll start with the first data piece that we did not receive, and that is the employment situation report from the Bureau of Labor Statistics, which was supposed to come out today at 8.30. Due to the few days of the government shutdown, that report will be delayed until Wednesday of next week, and that is an important number because it brings us the new non-farm payrolls and the unemployment rate. So, we'll continue to watch that next week. So now let's focus on the reports that we did receive. So first we received the JOLT (Job Openings and Labor Turnover Survey) report from the Bureau of Labor Statistics, which gives us new job openings, and that was a decrease down to 6.5 million job openings for the month of December, and that was about 400,000 lower than the November number. Second, the initial weekly unemployment claims report from the Department of Labor came out at 231,000, which was up mildly about 22,000 from the prior week, but continues to remain in a very stable corridor. And third, two other reporting agencies showed softening in the labor market with the Challenger Grand Christmas report came out at 100,000 private payroll cuts, And that may have been related to a couple large companies, but we'll continue to watch that. And secondarily, ADP came out with their private payrolls report, which showed only 22,000 new jobs were created in the month. So, net-net with all this data on the labor market does show some signs of softening, but more importantly, it is the consistency on what is being described as the low-to-hire and low-to-fire jobs market. So, let's turn to George to start our conversation today with some reaction to that economic data. George, I know you got a thought or two on that. And also maybe we'll move to some thoughts on the dollar debasement trade during our conversation. So George, give us some of your thoughts on the labor market.

George Mateyo [00:04:21]

Well, on the labor side, Brian, really quickly on the employment numbers, I think there's a lot of cross-currents, as you mentioned. The data still now has gone kind of back in the easy period of time, I guess, if you will, without a real clear read of the the situation, but I think it is kind of fair to say that there's probably three, at least three cross-currents that are impacting the employment situation. One, of course, has to do with AI, and it doesn't seem like that's having a big impact just yet, at least on the employment situation writ large. But I think at the margin, you're hearing some companies prolong hiring, maybe not hire as many workers, those type of things at the margin are probably attributable to AI to some extent. So you've got the AI effect, number one. Number two, many companies, frankly, over hired coming out of the COVID pandemic, and now they're maybe unwinding some of that. So that's another wrinkle. And then thirdly, you have this situation with respect to immigration and how that's altering the supply equation as relates to employment. So I think there's a lot of cross course there. The data you mentioned is decent data, but I think it's probably viewed mostly as sub quality relative to the other data series that we often look at. And I would guess, if our listeners are listening over the weekend, And they focus next week on the unemployment numbers that come out. If we see unemployment numbers, the rate itself rather pick up to say something like 4.7 or so percent. That'd be a pretty big jump in a month. But if it does get to that point, maybe that's the point of the level which the Fed would probably think about moving and maybe cutting rates, but we're not there quite yet. And the other thing I heard over just over the last few days or so is that many people think we probably won't get a really true read on the labor market until sometime like April or May, based on the backload of data that we still have in front of us. So I think it's fair to say that we're probably going to be muddling through a while longer in terms of the overall sentiment around the labor market, the strength of the labor market, and what that really means for the economy. The other thing that's been creeping into the investment narrative of the macro level, in a way, has to do with this notion of dollar debasement. If you look at the standard definition of debasement, it usually refers to something being reduced in value to the point of almost being rendered useless. I think that's the definition I saw. I think that's probably a bridge too far to talk about what's happened with the US dollar. I think it is fair to say that the dollar has been declining. We've been talking about that for some time, but it's not really being debased. It's not going to be replaced by another currency as the world reserve currency anytime soon, in my view. We just don't have an alternative, frankly. I think it's true at the margin that people are right to be concerned about maybe the relative decline of the dollar, but frankly, other countries are seeing interest rates go up. Interest rates here at home have been stable to slightly down. I think that just alone suggests that maybe the dollar on a relative basis is somewhat less attractive and less valued relative to others, but it doesn't mean it's going to be debased. What we've been arguing for quite some time is that we want to see probably people embrace diversification again, That probably means, as we've talked about now for the past year or so plus, it means holding international equities, international fixed income, where appropriate, to diversify your portfolio to have some currency benefit if the dollar does continue to decline. So I think that's really the kind of key takeaway for me as it relates to both the labor market and also this notion on dollar debasement. We can get into it more later if you like to, Brian. But I think the other thing that's being debased right now, Steve, has to do with software. And in the last couple of days, people are arguing that maybe we've seen AI disrupt kind of from within. And what I mean by that is we've seen companies in the software industry move from the disruptor to now being the disrupted, if you will. And I'd love to get your take on what's happened in the software sector in the last couple of days.

Steve Hoedt [00:08:00]

Yeah, George, I would compare it to the Deepseek moment a little over a year ago now. And, you know, I think that obviously the theme of AI disruption is deepening. I think people have varied on the areas that they thought were going to be disrupted. And I don't think people had thought that technology was going to end up disrupting technology stocks, but that's exactly what has happened this week. And software has clearly suffered some hammer blows. The event that was the proximate cause of it, there's a privately held company called Anthropic, and they released a co-work tool this week within a short period of time, not so much this week, but they released a co-work tool for the legal industry. And essentially, what happened is a lot of market participants started to connect the dots and said that if they can do this for the legal industry, what industry can't they do this for? And you saw software stocks sell off, you saw financial data companies sell off, basically anything that could have one of these tools released for it, people were thinking that this was going to put serious pressure on their business models going forward. This is not something that's just been a US phenomenon. It's happening in Europe and Asia, too, across the board. So software stocks globally have gotten hit by this. We've seen a tremendous amount of volatility introduced into areas of the market that have up to this point not really experienced all that much. I mean, you would think software is just typically been the area to hide within technology. Yeah, semiconductors have been the cyclical area that's been crazy and all over the map, people have hidden in software. And right now that kind of whole narrative has been flipped on its head because the semiconductor companies are the key enablers for AI and the software companies are the ones being disrupted by it. So there's a whole kind of disconnect between the way that investors who came up in this business, similar to you and me, George, many years ago, Like the way that we've been trained to think about seeing the world with these stocks, that's not really in play anymore. And I think a lot of people are having a hard time understanding what to do. And really, the question that I have is, are we getting to a point where we're capitulating in the software names? If you go back and you look at the highs for these stocks, the highs for these stocks were back in September. Now, that would make it seem like we've had a multi-month period of... massive underperformance, but really the stocks were only down, say, five to 10% coming into the year. And what we've seen is we've seen a total of $2 trillion worth of market cap erased since that September peak, with the bulk of that $2 trillion happening in 2026. And I think that's really what has gotten people's attention. Like there's a tremendous amount of wealth that's just been vaporized. by this and we're trying to come to grips with not only what does this mean, but we've said all along, there's going to be winners and losers in AI. And this was going to be the year that we were going to pick, the market was going to pick from winners and losers. I think the market was thinking it was going to pick between ecosystems. I don't think the market was thinking it was going to take an entire classification of stocks and throw them under the bus. But that's exactly what's happened, because you can't look at a software chart and not see it going down to the right right now. And the bid has been just relentless for selling. There's nobody willing to step in and buy.

George Mateyo [00:12:08]

I think you're right. Well, first of all, I think you've kind of nicely called me old, but I'll just take that as a compliment since you said we've been around and seen—

Steve Hoedt [00:12:16]

George, we're the same age, so I'm not calling so I’m not call you old!

George Mateyo [00:12:19]

Fair enough. Fair enough, but fair enough. But I think there are some parallels to what happened 25 or so years ago when we had the dot-com bubble inflate. And when I remember that of that period of time, well, a couple of things, but one of which is the fact that usually you start to see earnings for these companies they don't really fall apart right away. And that's I think where people are having problems understanding what's going on. Typically, the stock prices move first, as they typically do, and then earnings start to catch up later. And you need to see earnings trough, I think, at least the abbreviations trough out a little bit before you actually start to see a real credible bottom. You're right to point out also, I think, Steve, there's probably a lot of babies being thrown out with bathwater, I guess, to use the metaphor, in the sense that software is a very diverse group of companies, and it's not really one monolithic type of category or industry. And I think there's a lot of differentiation, as you pointed out, that needs to be sorted through. And the other thing that we kind of talked about, too, and we've written about this, I think, for a while now, is that people probably should be diversified beyond just that MAG7, the core of companies that really dominates the market cap indices that you mentioned. And so we've seen some broadening out, and I think that's going to probably continue to play out. I don't know if you agree with that, but I think that's one thing that I would say is a tangible takeaway.

Steve Hoedt [00:13:33]

George, what we've really seen, the tangible takeaway for me with this is that the market has been gravitating to stuff. And by that, I mean companies that have manufacturing facilities and companies that have mines and refineries and this kind of stuff. And those stocks have outperformed year to date and they've outperformed pretty markedly relative to the tech stocks during this kind of conflagration period that we've been going through. And the reason for that is simple. When you're dealing in this virtual world that's being disrupted by AI, nobody really knows what's going to happen three years from now. But you, you surely do know that we're going to need oil that's coming out of a refinery or, um, stuff that's coming out of plant XYZ. And I think that it's a simpler call for investors to rotate capital to, for lack of a better word, hard industries in this kind of environment, because we understand those businesses and we understand the need for them. Whereas the tech stuff, it's anybody's guess what the world's going to look like three to five years from now.

George Mateyo [00:14:43]

Yeah, and I think probably a safer bet, if you will, is thinking instead of the companies that are going to be changing the world, maybe think about the companies that can actually benefit from the change of the world. So that actually has been kind of another idea, another theme of ours, is that maybe it's the enablers that have been beneficiaries for the past few years. Now we start to see the adopters of AI over time. That could be cyclicals, as you talked about, that could be other industrial companies, maybe financials, healthcare, other things beyond technology that could actually benefit from AI. So the other thing I think, Rajeev, to kind of get you to this conversation too, is that one thing we talked about when we had our call last September on this theme of AI, we talked about some differentiators as well. We talked about specifically that maybe companies inside the private credit universe might be adversely disrupted by this. And I'd be curious to get your take, if you look broadly, Rajeev, at the overall credit markets, how are they processing this disruption that's happening in software, and maybe overall, if you look at the credit universe as a whole?

Rajeev Sharma [00:15:40]

Well, it's a very good question, George, because we've been talking about how credit spreads have been very well behaved. Certain pockets within investment grade and high-yield credit have outperformed consistently, almost to the point where we're questioning complacency in the market. But if you try to see the impact of just this week on credit spreads, and if we think about the public markets first, investment grade spreads, they widened this week. We did see some widening. We saw about three basis points of widening. So very well contained at these extremely tight levels that we're currently trading at. And this is the investment grade market after January, that's $200 billion in new issue supply. So if you look at the investment grade market, I think to the point of diversification within sectors. I think certain sectors have outperformed tech and the investment grade side. And these have been sectors that are your more brick and mortar type sectors. Industrials, they've done extremely well. They've gotten tighter. Communications have done well as well. But then if you try to peel the onion a little bit, you go into the high yield market and how that performed this week, it was interesting to see that spreads moved about 17 to 20 basis points wider on the week. And that was a function of the risk-off sentiment that was in the market that we have been seeing. But if you want to look at year-to-date performance, and let's think of the riskiest side of the markets, and let's start with the CCC rated bonds, they have outperformed all other U.S. debt categories so far this year. So year-to-date, CCC rated bonds are up over 1% for the year so far. And that shows that there remains These concerns about defaults for CCCs, they haven't really materialized as far as investor sentiment goes, at least not yet. If you think about the private markets, I think there's going to be certain pockets of the private markets that are going to be impacted now, because I do think that investors are discerning exactly what they're trying to buy here. What exactly is the underlying collateral of what they're buying? What are these names that are part of the private credit market that were not able to come to the public market to raise that, but they had to do it privately. So I do think that you're going to start seeing some kind of impacts There as well, especially certain sectors within private credit, are going to be impacted. If we look at the fixed income markets in general and how they did this week, the yield curve this week digested a lot of information, mixed labor reports, ongoing uncertainty about the Fed's next moves. Specifically, we did see the two-year Treasury yield move lower by about 10 basis points. So, there was this run to safety haven. We did see the two-year around 3.48% by the end of the week. The 10-year treasury note yield moved lower by 7 basis points to 4.20. So again, we saw as yields started to creep above 4.25% on the 10-year, investors do step in and buy in. And that pattern has been going on since September. We do see that the market continues to pay really close attention to the labor market. And to your point, George, they're looking for signs of sustained cooling. And we're not there yet because some of the data has been stale. due to the government shutdown. So I do think that, to your point, April and May probably is a time when we get some really good, fresh look at data. That's going to really shape the future of rate cuts. But the Fed is not the only game in town. We did see the European Central Bank and Bank of England both hold their rates steady this week. The ECB held its deposit rate at 2% for the fifth straight meeting. And it has a lot to do with the fact that they feel that the inflation is close to their 2% target. And then policymakers at that point couldn't really justify making a move with inflation and growth expectations where they are. If you look at the Bank of England, they also kept their rates unchanged, and they're sticking to this gradual easing path after the previous cut that they had. They're signaling a gradual downward path in rates. And so both central banks, much like the Fed, are in this wait-and-see mode, and none of the central banks really want to risk a policy error. There's been some other news in the market that has affected the fixed income markets as well. We did see that The Fed member composition is always on everyone's mind. What is the eventual Fed makeup going to look like? Steve Miran resigned from his White House Council of Economic Advisors role, but can legally remain Fed governor until a successor is appointed. That is standard practice. What it does do is it keeps Miran on the Fed board. And as we all know, he's been a really strong advocate for aggressive rate cuts. So, his presence does have some influence. Kevin Warsh, as we also know, has been nominated to replace current Fed Chair Powell, so he won't be aiming for Miran's spot. So, he's pretty comfortable in that chair position if he gets it. Who will take Miran's spot eventually? It's most likely going to be someone aligned with President Trump and one that pushes for faster and deeper rate cuts. But I don't think there's any really rush to get somebody nominated at this point for that role. There's enough other noise in the market right now that the Fed and the White House need to work on.

Brian Pietrangelo [00:20:27]

Rajeev, I read a narrative that they might put Walsh in Miran's spot to get him on the board first before he becomes chair. Do you think that's possible or unlikely?

Rajeev Sharma [00:20:37]

I read that as well, Brian. I don't think that's likely. I think they're going to really focus on Kevin Walsh being... that person to replace Fed Chair Powell, I don't think they would want to kind of start to play optics here with that. So, I think they have a bunch of other things that they're trying to be concerned about. Their number one goal is to get Kevin Warsh appointed. And I think they're going to just continue to focus on that. They don't want to ruffle feathers of any other Fed members or Fed governors out.

Brian Pietrangelo [00:21:02]

Great summary. Thank you, George, Rajeev, and Steve. But before we close, let's get your Super Bowl picks, folks. Who do you like? Steve, we'll start with you.

Steve Hoedt [00:21:14]

I got to go with the Seahawks. I mean, you got the former Spartan at running back for them. How can you go wrong?

Brian Pietrangelo [00:21:25]

There you go. Rajeev.

Rajeev Sharma [00:21:28]

I go for the commercials, but no, I really don't have a horse in the game. But I do think if we think about both teams, I think the Seahawks really are pretty stacked. I think they could run away with this game pretty quickly if they start taking an aggressive start at the beginning.

Brian Pietrangelo [00:21:41]

And you, George?

George Mateyo [00:21:44]

Gee, I'd like to be contrarian and take the Patriots, but I have a hard time running against the Seahawks too. I've got a, excuse me, I've got a sister-in-law out in the Pacific Northwest, so I'm going to go Seahawks 3117. What about you, Brian? What's your pick?

Brian Pietrangelo [00:22:00]

I do not have a pick, George, either West Coast or East Coast. The only affiliation for those of us here in Ohio is Mike Vrabel, the coach of the Patriots, as he did play at Ohio State and coached there as well. But that's the only affiliation I have. Well, thank you for the conversation today, George, Steve, and Rajeev. We appreciate your insights. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

Disclosure [00:22:48]

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