LIZ ANN SONDERS: I'm Liz Ann Sonders.

KATHY JONES: And I'm Kathy Jones.

LIZ ANN: And this is On Investing, an original podcast from Charles Schwab. Each week, we analyze what's happening in the markets and discuss how it might affect your investments.

KATHY: Well, hi, Liz Ann. We had a big day last Friday with the jobs report. Way above expectations, a real surprise. What did you make of that?

LIZ ANN: Yeah, it was nothing short of gangbusters pretty much across the board. And it wasn't just the much stronger payrolls release, which was up 254,000. Expectations were in the 150,000 to 160,000. The 254,000, Bloomberg tracks ranges of estimates by economists, and it was well above even the highest estimate that they tracked as part of the monthly survey that they do.

Also, we had positive revision to the prior month's data, and that bucked the trend recently of mostly downward revisions. And then one additional note, maybe this is getting a little bit in the weeds, but I think more and more people are aware of the fact that the Bureau of Labor Statistics does two surveys every month, one called the Establishment Survey, from which the payrolls number is generated, and then the Household Survey, from which the unemployment rate is generated. And there has been a huge, I don't know, it's like 2.5 million payrolls gap between what the Establishment Survey has suggested payrolls growth has been over the last couple of years versus the Household Survey. 

And there was an assumption by many economists that, if anything, you were going to see payrolls catch down to the Household Survey, but at least with last week's release, you saw a huge jump in the household measure of employment, too. And the fact that it was a muted change to the labor force participation rate, that helps to explain why the unemployment rate ticked down in this most recent release, which was also not expected. There was very, very little you could quibble with within the data. If you wanted to nitpick, hours worked came down a little bit, and long-term unemployment ticked up a little bit, but it was really hard to find much fault with that data. And clearly there was a lot of action in your world, Kathy, with the continued move up in yields pretty much across the board. So maybe share your thoughts on what has happened in the bond market and the obvious change in expectations with regard to Fed policy.

KATHY: Yeah, bond yields for both 2-year and 10-year maturities are now back to 4%, which we haven't seen since August. So we've done this round trip back to higher levels. And that reflects clearly the strength of the economy and that shift in expectations about what the Fed's going to do. Some of this started earlier when we had the GDP report that showed, oh, economic growth was actually pretty healthy at 3% in the last quarter, and we've run four quarters now in a row averaging about 3%, which is pretty healthy growth rate for an economy this late in the cycle. I don't even know where we are in the cycle, but this long after the last recession, let's put it that way, pretty healthy growth rate. And then you get the jobs numbers with the revisions, it seems to say, "OK, things are running along at a much better rate than we had anticipated." And I think now the market has to adjust to, "Well, what does the Fed do with this information?" There's a meeting in November. There's another meeting in December. I think that there's a good chance they'll pause in November instead of going ahead and making another rate cut. They may sit back and say, "Well, things are looking pretty good, really, in the economy overall. Let's maybe take a step back and wait for more data and look at what we do in December." Although I wouldn't rule out another rate cut because we still have an upper bound in the fed funds rate at 5%, which is pretty high. 

LIZ ANN: And we also have another jobs report between now and the November meeting and a couple of inflation reports, too. So certainly the needle could move a little.

KATHY: Yeah, and I think that's going to be the big thing is, you know, "What is inflation doing while the economy's chugging along at a positive real rate and jobs are growing?" The Fed is in what they call risk management mode now. The economy's in a good place, and we should all be really happy about this. I think that was like some … I looked at social media on Friday, people seemed upset about this. 

LIZ ANN: That was your first mistake.

KATHY: Yeah, I shouldn't have, but I just thought, you know, real earnings are growing. The unemployment rate is pretty low at 4%, and inflation is falling, and the economy's doing OK. I mean, there are obviously sectors not doing as well, like manufacturing and a few others, but in general, things are going along pretty well. So if you're at the Fed, what you want to do now is manage the risks up and down around that. You don't want inflation to go up too much. You don't want it to go down too much. It's hovering near 2%. They don't want it to go a lot below that. They don't want the unemployment rate to go up much from here. But if it goes down too much, that might create a shortage of labor and get inflation going again. 

So now I think it calls for more moderate pace, of slow and steady as she goes, looking at the data and making those adjustments, but smaller adjustments, I think, than had been previously anticipated. But look, it's all going to depend on how the inflation and the jobs numbers play out over time. This is one report. One report doesn't a trend make. We hope that we can continue to get good reports like this for the sake of all the people who want jobs, but it's not guaranteed. So we're looking at a slower pace of Fed rate cuts, ending probably between 3 and 3.25% rather than, you know, 2, 2.5% we've seen in the last couple of cycles. And just kind of a moderate way of going about this and feeling their way in a risk management mode. So when it comes to yields, you know, we've been saying that 10-year was fairly priced right around 3.80. We're bouncing around up to 4%, which is within kind of a range of tolerance for that kind of a forecast. There really not much likelihood that we're going to see big changes right now until we get more information. But we've got some CPI data and PPI data coming out. That might move things a little bit. And then, of course, more jobs data. I think for now, this is just a sideways, "try and figure things out as we go along" kind of market. It's certainly, I don't think, the start of a bear market in the bond market, but a pretty big readjustment to kind of focus on where we are today.

And instead of, "Gee, the sky is falling, unemployment's rising," Now it's, "Things are pretty good." So yields can just bounce around here for a while.

LIZ ANN: Yeah, and as a reminder, we touched on it, I think it was last week's show where we, you and I just sort of riffed on the Fed meeting and Fed policy and the moves in yields. And I pointed out and I wanted to reiterate that a Fed that is approaching this at a more moderate pace is not aggressively cutting interest rates. You want to wish for a Fed moving at a more moderate pace, based on history anyway, a Fed that is moving more methodically, not aggressively cutting, ostensibly because they're trying to combat a recession or a financial crisis or some combination thereof. Historically, the market's behavior has been much more benign, average maximum drawdowns about less than half as much in a slow-moving Fed cycle versus a fast-moving Fed cycle. So given where we are right now, and what we know right now, a Fed that maybe is taking their foot off the accelerator a little bit is not a bad backdrop for the equity market, at least based on history.

KATHY: Yeah, I 100% agree that this is kind of a really nice scenario we find ourselves in, and maybe that's what people are having difficulty grappling with. We haven't had this for a while. That said, one and done is very rare. It would be very unusual for the Fed to cut once in a cycle and not cut again. So there's more rate cuts probably down the road, but the urgency is not there.

 So Liz Ann, we have a guest on the show this week. Tell us about him.

LIZ ANN: Sure, I'm excited. It's Paul Hickey. He is the cofounder of Bespoke Investment Group, and he's also the head portfolio manager for Bespoke's wealth management services, and he creates and maintains many of their regular reports. And with his cofounder, Justin Walters, he co-writes the Bespoke Report. It's a newsletter on a weekly basis; I'm a regular reader of that. Paul appears frequently on CNBC, Bloomberg TV, Bloomberg radio, Fox Business, and his reports and findings and data and great backdrop from a macro and micro perspective have been extensively featured in publications, including The Wall Street Journal, The New York Times, the Financial Times, Barron's, USA Today, among others. Prior to founding Bespoke, Paul served more than six years as a research analyst for Biryini Associates, founded by my friend and the late, great Laszlo Biryini.

And during that time, he conceived and implemented in-depth and original research projects on domestic and global financial markets for institutional clients. And before his move to Biryini, Paul was at Salomon Smith Barney, couple of names that don't exist anymore, from 1997 to 2000 on the firm's Emerging Markets Fixed Income Structured Products Desk. 

So Paul, thanks again for joining us. I'm thrilled to have you. I have been following your work as you well know for many, many years. So it is a treat to have you on as our guest.

PAUL HICKEY: I'm thrilled to be here, Liz Ann. Just to be in the company of such wonderful guests you and Kathy have had over the last several months and throughout your time doing this, it's really great to be here. So thanks for including me as well.

LIZ ANN: Happy to have you. And it's such a breadth of research that Bespoke puts out. So I think maybe the best way to approach our conversation here is maybe to start bigger picture, and then we can hone in a bit more on some of the less evergreen aspects to some of the work that you have done and put out recently. So with that in mind, I wanted to focus in on what our always compelling data points that you and the folks at Bespoke reference. And one of which is around, as you put it, odds that can beat the house and the notion that the longer you play, the better your odds. That is, you know, singing from our same tune book, as you probably know. So give us the details behind that.

PAUL: Yes, so I mean, I think one of the common misconceptions if people who aren't in the market constantly feel is that the market is stacked against them and that, you know, the big guys have the advantage. But when you look at it for an individual investor, as long as you're willing to have the time in the market, you can really increase your odds of beating the house, so to speak. Over the course of any given day, it's basically like a coin flip as to whether or not the market's going to be higher or lower.

But then if you go out like a month, it's about 60%. Over the course of a year, your odds of being ahead in the market are about 3 in 4. And then as you go out over time, those odds steadily increase. And as you go out to 16 years, there's never been a period in U.S. stock market history where the market has been down over a 16-year period. 

So we tend to call it the Joe Montana rule, given his number 16. So that's something we try and reinforce to individual investors and to wealth management clients that you too can beat the house. Whereas if you go to casino, a sports betting app, you're likely going to lose your money. But if you stay with the stock market and stick with the plan, you can end up ahead.

LIZ ANN: Music to my ears, and of course I know that history around 16, and maybe it's because I'm a girl, although I'm also a sports fan—I was a Joe Montana fan—I thought "oh, sweet 16," another definition of that, but music to our ears, as you, I guess, would know, we spend a lot of time at Schwab talking to our investors about reining in emotions-based decision-making, and thinking over a long time horizon certainly helps that process. And you have some really interesting stats associated with that. Talk about the difference between owning the U.S. stock market. If you take it to a granular level, it makes a really important point between owning the stock market on the day after up days versus owning it the day after down days.

PAUL: Right, so going back, I love your calling it sweet 16, being a dad of four daughters, my third one who just had her 16th birthday. 

LIZ ANN: Wow.

PAUL: So I've done three sweet 16s already, and so I have one more. So in that respect, I like that sweet 16 analogy, but getting to your point, you know, when you go on CNBC or something, Liz Ann, I'm sure on a big up day that people say, "Is it time to get in?" On a big down day, "Should we sell and take our profits?" Those two questions may be the two worst pieces of advice you could possibly take. 

LIZ ANN: Hear, hear.

PAUL: If you just look back in the market, if you only had exposure to the S&P 500, this is going back to 1993, if you only had exposure to the market the day after an up day, you'd be up 14%, not 14 % annualized, but 14% over that entire time period. Now, if you did the opposite and only had exposure on a day after a down day, you'd be up closer to around 750% since 1993. 

So it just goes to the idea that your emotions and the market don't mix, and you have to keep those separated. You're better off just flushing your money down the toilet than letting your emotions get the best of you. And then on another point, we have an election coming up in November, and talking about politics is the worst possible thing, so I'm just going to keep it high level here. But back in 2008 when President Obama was elected, I had so many conversations with people who said, "I'm taking my money, I'm not putting my money in the market because Obama's a socialist. He's going to tank the market." Then in 2016, Trump was elected, and you had a whole different set of people saying, "I don't want to be involved in the market. Trump's going to destroy the economy." So if you look back over history, if you had been long the S&P 500, this goes back to like World War II, if you had invested $1,000 only when Republicans were in office, you'd have about $27,000 today.

If you were only invested when, and had exposure when, Democrats were in office, you'd have about $55,000 today. So first of all, before you say, "Oh, Democrats are better than Republicans," Democrats have been in office longer than Republicans. So that explains some of the difference. And the annualized returns are basically identical for Republicans versus Democrats. So neither party has an edge, newsflash. But if you had been exposed, if you just had exposure in the market in 1945, and you just kept that $1,000 invested over the long term, you wouldn't have $27,000. You wouldn't have $55,000. You'd have like $3 million. So to let your emotions and your political beliefs get the best of you is just, you know, you don't want to do it.

LIZ ANN: I'm so glad you said that. My colleague Kevin Gordon and I, who is on my team, we wrote an election-related piece a week ago, and we have very similar stats. We did it in growth of $10,000 variety, and we did it in starting in 1948 and carrying through, and same numbers, but on a different scale. $311,000 is what $10,000 turned into under Republican presidents, turned into $1.2 million under Democratic presidents, but it turned into almost $38 million if you just had it in the market. And I always say, "I don't know about anybody else. I'm taking the $38 million and letting the 1.2 and the 300 battle it out for some weird form of supremacy." I'm fascinated because I love that. Not that anybody should trade by only being in the market the day after a down day or vice versa, but it really drives home the point about staying in the market and some of the emotions that kick in with regard to timing. 

And I also love that you push back on the whole "get in, get out." Probably the most common question I get by the media when it's one of those tumultuous days or weeks is, "OK, Liz Ann, are you telling your clients to get in or get out?" And I think, "What a stupid question" because neither get in nor get out is an investing strategy. It's just gambling on two moments in time. And that is not, I don't know about you, but I've never met any successful investor that got there with that get in, get out, especially when it's emotions-based.

Another hot button issue in the current environment and one that I think does spark emotions and certainly is tied to this very unique cycle and what the Federal Reserve has been up to is the inflation backdrop. And I find that that is still top of mind for investors when I go out on the road and speak. But I know our listeners would be interested in why you refer to the stock market specifically as "inflation's kryptonite."

PAUL: Yeah, so I mean, think when you look back at history, the purchasing power of $1,000 in, again, 1945 is worth less than $100 today. So you've lost 90% of your value of that $1,000. So if you put your money under a mattress in 1945, it's a lot smaller nest egg that you have now.

We were just talking about having exposure to the S&P 500 buy-and-hold from 1945 on, and you'd have something like $3 million today. I was looking at a newspaper ad from 1945, and a dozen eggs was $0.35, 25 pounds of flour was $1.20, and a new car averaged about $1,000 depending on whether it was a nice car or, you know, an economy-type car.

Today, a dozen eggs is about $5 a dozen. A pound of flour is $1, not 25 pounds for $1. And a car is about $50,000. So that $1,000 in 1945 would have bought you 10 cars. That same $1,000 in the stock market today is over $3 million. And even though a car is $50,000, you could buy, I mean, what's the math? I think it's 800 cars today with that money. So inflation is a killer of wealth when you're sitting in cash. But when you have that money invested, you can really offset the impact. And while high inflation is bad for the stock market, we saw it in 2022, especially high-growth stocks, in the long run, stocks are also somewhat of a hedge against inflation because as you have inflation, revenues of companies are going up.

And that, you know, on a nominal basis, it increases company revenues and hence earnings per share over time. So you know, there's no better inflation hedge than the stock market over the long term.

LIZ ANN: Yeah, couldn't agree more. So let's leave the so-called evergreen forest and come a little more into the here and now. You recently put out a really interesting report that was just a somewhat simple pros and cons for the equity market. I will point out at the outset, for what it's worth, your pros list is longer than your cons list. So I think on the surface, that's a good thing, but I was hoping you could highlight in your mind what are some of the most compelling or significant factors on each of those lists.

PAUL: Yeah, so I think from my perspective, I like to get the bad news first. As far as the market is concerned, when we look at what's going on with the market perspective now, some of the big worries: First of all, you have valuations. Valuations by any stretch of the imagination aren't cheap. You can say the market's very expensive, or if you look at the median stock, you can say that it's somewhat reasonable, but it's hard to say that the market is cheap. Every sector, I think with the exception of energy, is trading in the 80th percentile or more of its 10-year P/E range. So the market's not cheap. Whenever we do this report over the last few years, valuations have always been a con. And that brings home the point though that valuations are one of the worst timing tools you could have in investing. So it's always a con. It's always something to be concerned about. And what I like to say is that valuations are more of, say, gasoline—you need a spark to get that going. So even if the market's cheap, the market's not going to rally because the market's cheap unless there's a catalyst, and vice versa.

LIZ ANN: And you know, related to that, it's often why I also say that valuation is almost a sentiment indicator or an indicator of sentiment. 

PAUL: Yeah, great point.

LIZ ANN: And part of the reason why it's not a good market-timing tool, because valuations can get rich and stay rich for an extended period of time, and vice versa. So I think you're absolutely right.

PAUL: Yeah, I think that's a great point. It's a reflection of sentiment. And sentiment right now, it depends on what you look at. Investor sentiment measures are very bullish, some are not so much. You look at strategists, most strategists, even after raising their price targets for the S&P this year, are still below where the market is on a medium basis. So sentiment's one. I think the biggest issue right now and one that I wouldn't even begin to try and handicap is the geopolitical situation and what's going on in the Middle East. You have a situation where nobody knows how that's going to play out and it could impact the price. We've seen it have some of an impact on oil prices already, and the higher oil prices go, we saw that again in 2022, the Russia-Ukraine war, when we saw oil go back up to $100 a barrel, what that caused as far as economic impact and sentiment towards inflation. So I think the geopolitical issue is something you don't want to necessarily dismiss. You want to focus on it and be aware of it. 

And then another one that we look for the more timely here is the month of October. We got through September, and everyone's like, "Yeah, the worst month's behind us, and everything … back to the best three-month period in history for the stock market." So that's true, and as you know, market bottoms tend to occur in the month of October. But in order to get a market bottom, you have to see market weakness. And if you just look back through history, the month of October has had the biggest average peak-to-trough declines of any other month of the year. So it's still early in the month. I wouldn't necessarily dismiss the potential for a pullback. You have years, just from a seasonal perspective, in the years where the S&P has been up 20% for the first three quarters, it's just a statistical anomaly, perhaps. But seven out of those 10 Octobers were down. 

LIZ ANN: Hey, Paul, can I ask you a follow-on question to that? 

PAUL: Sure.

Do you know what month is the opposite? Does it, by nature, sort of follow it? Is it November, where it's the largest trough-to-peak?

PAUL: So the frequency of 5% drawdowns is the lowest in December. And then April is the second lowest at 14 and 15%.

LIZ ANN: OK, makes sense. Thanks. Great.

PAUL: So yeah, so those months are the months that you tend to see the most calm in the market. And peak volatility, tend to see that in October. We have earnings season coming up, which can always increase volatility. And you have the two hurricanes. You have Helene and you have Milton. So hurricanes, throughout history, and I hate to talk about them from a market-related perspective, but throughout history, the impact on the markets has tended to be short-term. Geopolitical issues can cause a recession, but not many recessions have been caused by weather events. But they can be catastrophic on a certain region of the country. 

LIZ ANN: Before you get onto the pros, let me just ask you one more question with regard to one of the cons that you mentioned on geopolitics. So the work that you have done in terms of if and when something geopolitical, a crisis, an eruption of something, turns into something more protracted and has a longer-lasting impact on the market in one direction or another, is it usually because of what feeds through the energy markets, the oil-price channels? Is it commodity-price related, or is it just the general uncertainty and the malaise associated with that?

PAUL: I think it's more the energy side of the situation, but wars can have a big impact on investor psyche as well, but oil prices, again, we saw it in early 2022, the '70s, the oil price shocks because of geopolitical issues. It typically came down to oil, and even though we are less energy-reliant of an economy today, although that may be changing with as everything becomes electrified and AI. But energy prices are one of the heads of the three-headed monster that we call energy prices, the dollar, and interest rates. So when those are all rising in unison, it tends to be bad news for the markets. And when they're falling and near lows like they were just recently, it tends to be good for market returns going forward.

And then the last con I almost left off was semiconductors, they're the transports of the 21st century, we call them, and they're a great leading indicator in this electrified economy and information economy. And they've also been a great leading indicator for the market. And on a relative basis, they peaked ahead of the market in the summer. Just starting to see that downturn since the summer starting to break. I think Nvidia just recently was making its first higher high in close to four months.

LIZ ANN: So semiconductor weakness is more of a potential con for the broader technology sector or the overall market? Or maybe they're just so related that it's one and the same.

PAUL: Yes, that's a great point. So what we've done is when we've looked at it in the past, so going back over probably since like the iPhone era, 2007, when we became a more mobile and digital economy, you tend to see major peaks in the relative strength of the semiconductors versus the S&P 500. You would see that peak or trough oftentimes ahead of the market.

So that's one of the things that we've been watching as a potential con. So that's the bad news. Some of the good news is, I think, the first respect is the Fed. The Fed is now our friend. That's great to hear. We may not be getting a 50-basis-point cut at the next meeting. But I think just as far as the Fed is concerned, when the market isn't worried at every economic report whether the Fed's going to hike or not, especially after what investors have gone through over the last two years, that is a, not an all-clear, but it's less of a roadblock for the market. 

LIZ ANN: Now, would the Fed stay on your pros list if, let's say, we get a hotter set of inflation readings this week as we're taping this, it predates the release of CPI or PPI, and/or another very strong jobs report. Let's say we're heading to a Fed that opts, at least at the November meeting, to not do anything, not cut rates, go back into some version of pause mode.

Do you still think the path of least resistance is down, and would that stay on your pros list, or would you reconsider?

PAUL: So we would still consider it as a pro until we started hearing guidance from Fed officials that, "Oh we may have messed up. We shouldn't have cut last month. We should probably think about taking back at least 25 basis points of that." That would bring it back to a con. We have one thing we call our Fedspeak Monitor, where we take every Fed official's public comments, as well as the Beige Book and Fed statements, and we go through them and we qualitatively rank them, whether it's a dovish, hawkish, or neutral statement. And in the last several weeks, that Fedspeak Monitor showed the most dovish central bank commentary since 2021, when they were still talking about … or not even thinking about thinking about hiking rates. So for now, the Fed is a positive, but it's not just the Federal Reserve.

We're in a global easing cycle right now. Nineteen central banks around the world, their last rate change was a cut. So you know, the U.S., you could argue maybe the U.S. doesn't necessarily need lower interest rates, but you look at China, you look at Europe, the rest of the world economy isn't doing great. But if you have those central banks easing policy, at least some of that's going to bleed over to the U.S. even if the Fed stays on hold.

So that's one of the pros. And then the economy, usually the Fed is easing because the economy is not doing great. And when you look at the economy right now, on some of your prior shows, one of the key things we always hear is that this economy is so difficult to navigate. And it's so crazy to the fact that we're cutting rates in an environment where the stock market's at highs.

You know, we see such conflicting signals between manufacturing and services, even within manufacturing, whether it's surveys or hard data, we're getting different, we're totally getting different vibes. So the economy, the growth scare that we all had in early September when the Fed shifted its focus from inflation to employment, well, it's starting to look like a lot of that could have been a statistical anomaly.

So the jobs market isn't as strong as it was two years ago. And I think that's more of a good thing than a bad thing because employers couldn't find people to hire. At least we're starting to get some equilibrium. So if you look at the Citi Economic Surprise Index, that's turned positive after several months negative. And another, we track just the momentum of indicators on their year-over-year basis, and the majority of them this month, for the first time in five months, actually showed improvements in their year-over-year readings versus deterioration. So they weren't all positive, but they were getting less worse.

LIZ ANN: And I assume you're, as it relates to the combination of the economy and the Fed, I assume you're in the, for the most part, "Good news is good news" camp. 

PAUL: Yes, without a doubt.

LIZ ANN: And that we shouldn't be wishing for terrible news. We shouldn't be wishing for a Fed that has to step up and get much more aggressive with rate cuts because of the backdrop of what that would suggest. I know that's the camp we're in, that we're in a "Good news is good news" and "Be careful what you wish for if you're hoping for really weak economic news."

PAUL: Yeah, I think ever since last December, you know, December 2023, when the Fed was signaled that they were done hiking rates, that we've almost been in that environment. And I think a 50 handle on an ISM manufacturing would be great. It's been long enough since we've had one. But I think that would be a good thing to see just to see some stabilization and growth in the manufacturing sector because it's been so that has been so weak for so long. 

And then it would also show that maybe some more private sector activity. One of the factors keeping this economy so strong relative to other global economies is, you know, they say, "Don't fight the Fed," but you know, you also don't want to fight the feds. You know, if you're, if you're in a conflict with the government, the government has unlimited resources to sue you, and it's hard to win. And if the government wants to keep the economy from going into recession, they have a lot of resources to do that. And we've seen that in a lot of fiscal spending over the last two years. Whatever the longer-term ramifications, we can debate that, but in the short term, it's been an economic pro. And then the last pro, I mean, there's plenty others, but I think one of the more interesting ones is how we've seen the handoff in breadth from the Mag Seven to the rest of the market.

September was the first month in this entire bull market since it started in October 2022 that the S&P hit a new high and the tech sector didn't hit a new high. And if you go back to the July highs before we had the pullback in August, the S&P, as you know, is up about 1%. The average stock is up over 3%. So we've seen a big handoff in other sectors picking up the slack.

LIZ ANN: Yeah, and equal weight having outperformed the cap-weighted S&P in the third quarter. That was a big shift.

PAUL: Yeah, you know, in the first half that was a big complaint towards the market that it was just the Mag Seven, and now, you know, some of the skeptics are saying, "Well, the Mag Seven aren't doing anything, so this market is in trouble because if those other stocks fall, then we're in trouble." Well, of course, but you know, as of now, they've picked up the slack, and that's something that people were very worried about, and the fact that we were hitting new highs and of the Mag Seven only Meta was hitting new highs. I think that was impressive.

LIZ ANN: Yeah, and I think that one of our themes, and I'll see if you agree, is that this broadening out the rotation, some of the leadership shifts, probably has legs beyond just what was a third-quarter period of outperformance by equal weight and some profit taking up the cap spectrum. But we've been saying probably has legs in fits and starts, that there's still probably money that wants to find its way back into tech and comm services and the Mag Seven.

So do you think this broadening out, these leadership rotations are likely to persist?

PAUL: Yeah, I mean, I think so. Nothing steady. But when you have central bank policy around the world on an easing, more of an easing posture, that's going to benefit cyclicals. So I think in that respect, that bodes well. And as we touched on earlier, one of the biggest cons in the market is valuations. But on a median basis, they're much more reasonable. And when you go to these non-tech stocks, non mega-cap stocks, there's a lot more reasonable valuations there. So people can shift into those areas and have a little bit more comfort. 

And one of the things that just blew my mind the first time I saw it a couple of years ago, and still, you know, people just are always fascinated by it, is that the Russell 2000's market cap is basically the size of Apple. It's a little bit higher now, but if the Mag Seven, we looked at one point, if they collectively pulled back 5%, it would have been like a 20% rally in the Russell 2000. And that's what we saw in the summer. Remember that huge surge we had when the Russell traded over four standard deviations above its 50-day moving average. It was the most overbought reading for a major U.S. index in history on a short-term basis. And it's that kind of shift when you see just a little bit of money from the big pool goes into the kiddie pool. It's going to start to cause things to overflow. And you can get those big moves. But what we looked at, when we found similar types of real sharp moves like that, you tended to see some short-term weakness because, after all, when you go to the most overbought reading in history, you're bound to see some profit taking, but it usually marked a significant shift where they tended to do well over the course of the next year.

LIZ ANN: All right, not that any of us have a clear crystal ball, so I'm not going to ask you for any kind of market prediction, but if I said to you that I've just come from the future, and I can tell you that one of your lists, your pros or cons, is going to get longer in the next few months, which list is it?

PAUL: I think I would go with the pros list. Again, I like the bad news first. But longer term, we're optimists. We're bullish on America. It's been the right bet for the last 250 years almost now. So I think in that respect, you can't go wrong betting on America and the U.S. economy and how strong it has been and how strong it's likely to continue being.

LIZ ANN: Yeah, well, music to my ears and, I think, our ears. I'm glad for the purposes of a podcast that you went with the cons first and the pros second, because that way we get to end on a positive note. 

PAUL: There you go.

LIZ ANN: So like I said, I love your work and your firm's work, and I'm thrilled that you agreed to come on and share your wisdom with us. So thanks for joining us.

PAUL: And again, thanks so much for having me. It's been a pleasure being on with you, Liz Ann. And hopefully we get to do it again sometime in the future. 

LIZ ANN: I'm sure we will. Thanks so much.

PAUL: All right, great. Thanks.

KATHY: Well, a lot of great insights there, Liz Ann. Thank you. So looking ahead to next week, it's the middle of October. The port strike has been averted, but we have a number of other things going on in the world that can cause some turmoil. What are the economic indicators that you're watching most closely?

LIZ ANN: Yeah, so before touching on the indicators that are top of mind for me, it's also the case that we'll celebrate, I guess for most investors, a two-year anniversary of this most recent bull market. And I wouldn't be surprised to see that garner a lot of attention. For what it's worth, bull markets that have historically lasted two years more often than not tend to go on for a third year, albeit with muted returns typically relative to some of the stronger returns that have marked the first year or two of a bull market. So I would expect to see a lot of commentary. In fact, our next report may indeed be a bit of a look back at this bull market so far. 

But in terms of the economic data, I've talked a lot about the regional Fed PMIs that I think increasingly have garnered some attention, in addition to the national readings on PMIs. The PMIs is just short for Purchasing Managers Indexes. You've got the ISM version of those for both manufacturing and services, and also S&P Global has a version of those as well. But the regional Fed surveys, both on manufacturing and services, can sometimes grab attention. You've got the Empire data coming out next week, and that has been a notably strong regional Fed survey relative to many of the others. We also get mortgage applications, and given moves now both down and up in a measure like the 10-year yield, which tracks mortgage rates, I think data or anything housing related is important. In fact, in the end of the week, we get the NAHB Housing Market Index, and we get both housing starts and building permits. In addition to Empire, we get the Philly Fed. 

Probably the biggest report next week is retail sales. So I think that that may capture some attention. We also get weekly claims. As we try to gauge truly what the path is for the labor market, I think weekly claims can provide some nuggets there. What about you, Kathy? What's on your radar?

KATHY: Well, yeah, all those economic indicators will be important. And I think particularly the retail sales, because what's powering this economy and preventing it from really slowing down is that consumer spending and consumers have jobs. And therefore, they're spending. And therefore, the economy is growing. So that's going to be important to see what the strength of that is. We have a lot of Fed officials speaking. And I'll be paying attention to what they're trying to communicate in those speeches because given everything that's gone on since the meeting and now with the jobs data, it will be interesting to see what the perspective is of various members because if you remember the dot plot where they all provide us with information about where they see the policy rate going over time, although we track the median estimate, there's a wide range, a big dispersion among the various members, as to how fast they think the Fed should go and how far they think the Fed should go in cutting rates. So it'll be really interesting, I hope, to hear what these various perspectives are. That'll give us a feeling about what exactly is the Fed keyed in on right now in terms of rate changes.

So that's it for us this week. Thanks for listening. As always, you can keep up with us in real time on social media. I'm @KathyJones, that's Kathy with a K, on X and LinkedIn. And if you've enjoyed the show, we'd be grateful if you'd leave us a review on Apple Podcasts, rating on Spotify, or feedback wherever you listen. You can also follow us for free in your favorite podcasting app.

LIZ ANN: And I'm @LizAnnSonders on X and LinkedIn. I am not on Facebook. I'm not on Instagram. I'm not on WhatsApp. Be mindful of that because there have been a rash of imposters, and they seem to be escalating again, particularly into WhatsApp. I don't run a private stock picking club. So don't get duped. Make sure you're following the actual me.

And also, you can find all of our research, our written reports, any videos that we might do on schwab.com/learn. You don't have to be actually a client; if you know how to put that in a search field, you can find all of our work on schwab.com as well.

KATHY: Next week, I'll be speaking with fixed income expert Carol Spain. So stay with us for that.

LIZ ANN: For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.