The Vibepression Economy With Kevin Gordon Of Charles Schwab

Yeah, I would say that there's not that big of a difference between the two right now, at least, and I just got back from doing a bunch of events. I was in San Francisco, I was in Houston most recently this past week, and I would say the dominant question is certainly this overall concern around affordability and how much it's going to continue to get squeezed the longer the war goes on. Is the market just looking past this oil shock and really kind of whistling past the graveyard? A lot of questions about the Fed. Probably not surprising because of the coming change in leadership or the sort of the one that we're in right now. But yes, it is generally this feeling that things have just run away too fast, too far, especially because of the split between what's been happening in Big Tech, specifically semiconductors recently, but then also the rest of the market kind of failing to keep up.

But it is interesting. I think that the general angst is not as bad as I would have expected and I think that is mostly reflective of how well the market has done in this rebound and the fact that we've made several new all-time highs, but I think that also speaks to the power of the wealth effect in the US right now and the fact that you've got record household exposure to stocks and financial assets and that most people who are in markets are benefiting from that. So, to me, I probably would have expected a little bit more angst, especially because of that visceral number of US gas prices really hitting people every single day when they fill up.

But I do think about this whole issue in the context of yes, affordability is the big concern, but that's very different than mass layoffs and joblessness being the big concern. So, affordability implies that you have a job or you have an income, you're just struggling with pricing. Not to say that's not an issue because of course it is, but I think it would be a very different scenario if you were talking about mass joblessness as the issue. And I think that just at a very basic, simple, fundamental level, not that anything about this is simple, but I do think that this really just comes down to the US labor market and how resilient it's been over the past several years.

I like to think of it in stock versus flow terms. So, yes, the flow slowed considerably, but the stock of payrolls is at an all-time high. So, when you have that monthly consumer spending engine going every single month, people still spend money, it still keeps the economy going on top of course what is a pretty remarkable CapEx story on the business side. So, that's how I think about the affordability issue and how we're hearing about it from clients as well.

I think that it's certainly now a delayed process because earlier this year, which feels like quite literally forever ago, when we were in this environment, you know this well, when we were in this environment of what was the consensus call? It was international will outperform US and there was this broadening of the market and the average stock was going to do well and big tech was taking this step back and the concentration issue was finally resolving itself in terms maybe more so in terms of performance, not in terms of market cap.

But when I was speaking to clients at that time, there was a little bit more of an agreement that, okay, maybe this is the time that I should start considering going shopping outside of the US and specifically big tech. Not to say that all of our clients are exposed that way, but that was a general feeling in terms of where you could find performance and outperformance. But I think in the conversations that I've had in the past month and a half, that has definitely changed again because of this really strong rally. So, I do think it has kind of set that ex-US bias maybe to the side a little bit or just pushed it back a little bit further.

We've been making that argument for before the beginning of 2026. It was a harder one to make several years ago. Started to feel like it made a little bit more sense last year. We just don't think about it in or terms. We always think about it in and terms. I think even the bond market today and the fact that yields are where they are, yes, do we have an inflation issue in terms of yields and kind of going up for the wrong reasons? Yeah, absolutely, but I think that if you're a longer-term investor and you do want to lock in some cushion on the bond side in terms of what you could be earning, then it's still we think it makes a lot of sense.

So, I think that number one, we always try to espouse the benefits of diversification across all these asset classes, but specifically with equities, we do try to hammer home this point that there is oftentimes, especially in the past couple of years, there's a big difference between performance and weight or performance and size in any index like the S&P 500. I like to use the example of Nvidia not because I cover any individual stock, but because it is the largest company. It's the number one contributor to the S&P 500's return year to date, but it's ranked 86th in performance.

So, this idea that you have to be in these large companies just because they're going to outperform, that's not always the case. Even small cap tech, you look at S&P 600 tech, it's completely outperformed S&P 500 tech over the past year, but that doesn't really get talked about or covered as much and it kind of goes unnoticed. So, I think there's so many ways that you can, even within the US and within one sector, whether it's tech, whether it's communication services, there's so many ways to find that outperformance and that diversification. It doesn't necessarily need to be international. Even if we do think that makes sense for somebody longer term.

I think you make a good point about the news flow. We live in this 24/7, sometimes I call it 25/8, news flow world because it's just all the time everywhere. And as we just talked about, these are really the only names that are covered in the news and that at least dominate the headlines. Of course, there's other companies that are written about, but I think for anyone who's not as obsessive over all these details like maybe we are, looking at this all day long, all night long sometimes, they just might not be as exposed to that.

So I think hopefully that's where we come in as a team to help them understand what is out there. And sometimes I've had many conversations where we've gone through these discussions and then clients will say, "Yeah, but I'm still okay with that exposure that I have." And that's totally fine. So I think it's more just a case of know what you own and know what you're buying.

And I think that especially rings true at the individual sector level because some of these sector concentrations are getting pretty extreme, meaning the sector really is just explained by a couple of stocks. This is the case for tech where the top two names are, I think it's last time I checked, 55 or maybe more now, 55% of the sector's market cap. It's even more extreme for communication services with Meta and Alphabet where at times you're getting this sort of 70 to 80% range of them just dominating market cap.

I just think it is that instance of knowing what you're buying because if you're wanting to say, "Okay, I want to diversify out of this big tech lowercase T trade because all of these com services and sometimes discretionary names, the big ones, they get lumped into that tech trade." So, if you're thinking to yourself, "I want to diversify out of that and I want to go into communication services," your move is still being explained by essentially just two names. And it could be similar for discretionary as well.

That's why I like to look at discretionary on more of an equal weighted basis because of that skew with the larger names because they don't to me really represent true broader consumer America. It's harder to lump in everything home related with Tesla. Those are very different things. So, that's why I think that again, this kind of comes down to being educated around how are these sectors made up? Is there a massive skew or not? There are some that don't. Industrials or healthcare, maybe not as bad as com services or tech as an example.

Yeah, we've been trying to talk more about it whether it's a theme like AI or if it's a theme like consumer. We've tried to think about it and talk about it more in terms of thematics because I do think that to some extent sectors don't always explain that pure story. And actually, in some of the flow data that we've been looking at, we haven't seen as much in this rebound since the March 30th low. We haven't seen as much sort of dip buying across the spectrum of just broad indexes or broad sectors. It's actually been a little bit more stock specific and I think that is a little bit more thematic specific because of how people think the AI trade is at least shifting in terms of what we're hearing and what we're seeing, but moving gradually away from the big creators and more towards some of the adopters.

It's not this one-for-one trade or trade-off, but that is generally how people have been thinking about it. And yes, I've gotten a lot more questions around utilities names and energy names and materials names or just as those sectors have gotten more questions than ever before. So, it does go to show, I think, that people are demonstrating more of a meaningful interest in areas outside.

And we do have a lot of clients, at least in the events that I get to speak at, a lot of the questions are around, "I've got this massive concentration issue because I haven't really touched that part of my portfolio for several years." So, it is that effect and you realize the sort of compounding nature of that part of your portfolio over, call it, 10 years because the market, in terms of its concentration, I would say over the past 10 years, maybe 12 or 13, but it was right around that 2014-2015 period where things really started to split.

And so, that's not that long, but if you were just setting it and forgetting it up until this point, you're sitting with a pretty high concentration in certain areas. So, yes, we have seen people react to that and respond to that to some extent in terms of thinking about this diversification a little bit differently.

I have gotten that question a ton. Maybe not surprisingly, I got that question a ton when I was in the Bay Area last week. But no, there are these legitimate concerns around, "Is this overspending?" and "Is GDP only connected now to this business investment channel? So if that slows down, do we go into recession?" And then all of these breadth statistics that have been popping up, I know you've seen them a ton. My Twitter feed is littered with them right now. Some of which come from me because I have been pointing out that some of these divergences of okay, you haven't seen as much health in terms of the percentage of companies above their 200-day moving average. That's continued to tick down over the past couple of weeks, even though you've seen the cap weighted S&P move higher.

A lot of these breadth statistics do cluster around like the last time we've seen them has been that cluster around the late 1990s. So all of that, yes, again, it gets you to this question around whether it's a repeat. I don't tend to look at prior periods and say they're going to repeat because I think every time is different. Every recession is different. Every market cycle is different.

But even if you want to pick up the early 2000s as an example, I find it interesting because that recession was relatively short and shallow. And actually, interestingly, in 2022 when we had the pre-revised GDP double quarter, you know, two consecutive quarterly declines. Actually, that decline was worse than the decline in 2001. And you didn't have a recession in 2022. So of course, it got revised and then to the third quarter of '22 ended up being better than expected.

But you have a relatively shallow recession in economic terms in the early 2000s, but what I call a massive recession in stocks. And then you go fast forward to the financial crisis, you have a massive recession just in everything. And then you fast forward to COVID and a lot of people question whether that's a technical recession or not just because of how short it was in nature.

So I think comparing back to the '90s, could you look at these breadth statistics and compare? Absolutely. Does that give you a good sense of health of the underlying market? Yes. But I also do think that the fundamental story matters and how different it looks today. The earnings backdrop, I think, is different. But that doesn't mean that you can't get hype and you can't get bubbly activity.

I just think that we've been going through these sort of mini bubbles over the past several years. You can almost pick one out every single year, whether it was crypto in that sort of '21 to '22 phase, the meme stocks, the SPAC craze. We've gone through with single names this year that have all of a sudden just pivoted from becoming shoe companies to AI companies. So, it's happening in these little pockets, in these little segments. It's just not necessarily showing up as much in the broader market.

So, I just think the nature happens to be, I think a lot of that is because of modern media and how the news flow has changed and how we get our information. But, that to me is a little bit of what makes it different than the '90s or different from any period.