Joining us now in studio, Kevin Gordon, head of macro research and strategy at Schwab. Kevin, great to have you with us. There are a thousand directions we can go into, paraphrasing one Tom Keene. Let's start here with the tech sector. Look there. The SaaSpocalypse seems like so long ago.
When you look at the tech sector, what is animating it right now amidst all... We hear the president this morning talking about a superintelligence task force. All of that anxiety is still quite palpable. And yet...
You know, it's interesting. Tech sort of sat out a lot of the summer rally and recovery that you had seen in the market. So it kinda had that reverse effect that's actually happening right now where, you know, it's pretty much the only theme. It's not the only sector, but thematically, you know, you throw in everything related to AI that's been holding up the market because under the surface of this market over the past couple of months, things have actually looked pretty weak. The average maximum drawdown for an S&P 500 member since the beginning of August is 14%. Yet the cap-weighted S&P 500 is off its high by just 1%. So you've got this kind of resurgence in tech, I think, after going through this really long consolidation and churning phase where investors were maybe getting spooked a little bit by whether it was valuation concerns or all of the sort of social pushback against AI. That I think is starting to fade a little bit and now breathing a little bit more life into the sector.
When it comes to inflation, you write that there is no bad weather, just bad clothing, channeling either your Midwestern self, or this is also, like, a very European thing I always hear. What do you mean by that? Do we just need to toughen up and get over it?
Yeah. Well, specifically channeling Austan Goolsbee when he talks about... The Chicago Fed president, when he talks about inflation and monetary policy. You know, I think this is sort of the framework we need to get used to and use for inflation in this environment because with so much of the supply shocks that are dominating the headlines, things that central banks cannot control, especially related to oil and then, you know, end products related to fuel, there's very little that a central bank can do and that rate increases can do to combat that. But I think that at some point in looking at, you know, why the Fed turned hawkish and looking at just the inflation backdrop itself, the only tool that they have in responding to their price stability mandate is interest rates. So the idea that you have to now go through this cycle, which it may not be as aggressive as we learned from key officials this week, especially from, you know, the vice chair and then, you know, John Williams. So I think that it's sort of a new framework maybe for this environment to see how things have changed where they're not necessarily responding to demand-driven inflation.
Hear from John Williams again this week, Michelle Bowman, Lorie Logan as well. No surfeit of Fed speak happening. Yeah. There was this piece on Bloomberg just about the role that he, among others, John Williams is playing as kind of doing the forward guidance for Kevin Warsh. He doesn't like it. Do you feel the same way? I mean, do you feel like there's a lack of kind of forward-looking information here, or are these guys filling in the gap being left by the...
I mean, well, yes. I think they're filling some of the gap. But at the same time, I think especially after course correcting for himself, after course correcting from that July press conference, we've actually gotten quite a bit of maybe pseudo forward guidance from him in terms of what he looks at. Now we look... You know, the breadth of PCE components and how many are rising at a particular, you know, annualized pace. He looks at, you know, as he mentioned, some of the commodity, you know, pressures that he's paying attention to. So we have a good sense now of how he thinks about it. But, you know, even if we didn't, we would have a good sense of how the majority of the committee is thinking about it. So now you're stacking up, you know, a couple of these key voices, especially within that Fed troika of the chair and then the vice chair and then the New York Fed president. Now you're getting a better sense of how they're thinking about, I think, the pace of this cycle, which I think all else equal is actually probably the best case scenario right now. If they're gonna go maybe every other meeting, probably the best case scenario for the stock market because it's not this aggressive tightening cycle where they're trying to get, you know, growth to slow significantly or they're trying to hit the labor market. That does not necessarily seem to be the case.
I think so. Yeah. I think it makes sense, especially for, again, you know, even though you're in this environment where inflation is elevated because of these supply constraints, I think they wanna make sure that they're approaching this the right way, not trying to target demand too much, especially because it's sort of an indirect way of doing so. Plus, as we learned on Friday, I don't think the jobs report was as bad as the headline suggested, but I do think that there's still this desire on the part of the Fed, rightly so, to not wanna try to, you know, stunt the recovery of the labor market because it's still been a little bit of a choppy and an uneven recovery over the past year.
I'm talking about a guy named John Williams. Maybe you should say tempo and not cadence. Get it? Like, the other...
It's Friday. It's Friday.
I'm working on John Williams. With the jobs report.
You also wrote the economy and inflation cannot crack until the labor market cracks. Yeah. Timing on that, what are you looking for, or you think it's gonna hold?
I think... Well, you know, as we've learned in the past week, especially with the spending data that we got, you know, for August, it was a significant beat relative to expectations. You know, in inflation-adjusted terms, you know, 0.6% month over month was the strongest we've seen in a couple of years. So I think it gets back to the idea and the very sort of simple way of looking at the labor market of if people have jobs, they'll spend money. I mean, they'll figure out to adjust their spending if inflation is an issue, which it is right now.
