MARK RIEPE: Welcome to Schwab Market Talk. Thanks for your time today. It’s August 4^th, 2026. The information provided here is for general information purposes only, and all expressions of opinion are subject to change without notice in reaction to shifting market conditions. I’m Mark Riepe, and I head up the Schwab Center for Financial Research, and I’ll be your moderator today. We do these events monthly. Each panelist and I will be talking for several minutes about top themes that are on their minds, and we’ll do that for about 30 minutes, and then we’ll start taking live questions for the rest of the event. If you would like to ask a question, you can do that at any time. Just type the question into the Q&A box on your screen, and then click Submit, and we’ll answer as many of those as we can. For continuing education credits, live attendance qualifies for one hour of CFP and/or CIMA continuing education credit if you watch for a minimum of 50 minutes. You aren’t eligible for CE credit if you watch the replay. To get CFP credit, please enter your CFP ID Number in the window that should be popping up on your screen right now. And then Schwab will submit your credit request to the CFP Board on your behalf. In case you don’t see it, don’t worry, you should see it again towards the end of the webcast. For CIMA credit, you’ll need to submit that on your own. Approximately 50 minutes after the show start, the directions for how to submit it can be found in the CIMA widget that will be appearing at the bottom of your screen. We also have a Certificate of Attendance widget. You can find that at the bottom of your screen in the Widget dock. The certificate will be available after 50 minutes of attendance, and that also can be used as proof that you’ve attended. One last thing before our speakers join. We’ve got a couple of resources on the webcast console. In the top right, you’ll see a link to our new Chart Book Highlights and Portfolio Ideas. And in the bottom right, you’ll find some additional materials, including a link to our Q3 Investment Outlook for Advisors. Our speakers today are Collin Martin, our Head of Fixed Income Research and Strategy; Kevin Gordon, our Head of Macro Research and Strategy; and Chris Ferrarone, our Head of Equity Research and Strategy. 

We are going to start out with you, Collin. After last week’s Fed meeting, the committee voted 9 to 3 to hold rates steady. What has that done to your Fed outlook? 

COLLIN MARTIN: So our outlook has not changed, but we acknowledge that it’s relatively low conviction right now because the situation is very fluid. So we’ve been in the camp that the Fed is in wait and see mode, holding rates steady, but we acknowledge that the risks to a hike have clearly increased. And if we look at what’s happened over the past month or two, the relatively soft inflation readings in June, that looks like it bought the Fed some time to see how the next two months of readings and data look out before they meet again. But we acknowledge that the potential for a hike has increased. The vote at last week’s meeting was 9 to 3. That was a shift from the previous meeting. So there are some Fed officials, some voters, who are already in the vote camp. And if we start to see inflation pick up, and I think the bar is relatively low for some voters to maybe feel the need to hike rates. If we do see that pick up, that might get a few more voters in the hike camp. 

The big question, and I think concern for the markets, and we’ve seen some volatility with treasuries since the meeting is that lack of not just forward guidance, but the reaction function from new Fed Chair Kevin Warsh, where he hasn’t really given us too much about what his plans are. But we’ve gotten comments and outlook and feedback from a number of other Fed officials. And one thing that I like to point to is from the New York Fed President, John Williams, who kind of laid out his idea of what he needs to see to be comfortable that the disinflationary trend is still on track. And that’s core CPI, or core inflation readings on a month-over-month basis of 0.2% or less. So that’s something that we’re paying attention to. And if we start to see even just slightly hotter numbers than that over the next month or two, that might get a few other officials on board for a hike. 

Also, I don’t think we can ignore the labor market right now. The labor market has shifted a little bit where we’ve seen some signs of strength recently. So when you look at the balance there of inflation still too hot, and a labor market that has shown some signs of strength recently, you can see more officials getting on board with a hike going forward. 

So our view hasn’t changed, Mark. We are in wait and see mode, but we acknowledge that the risk of a hike has increased. And I think the bar is relatively low. If we start to get hotter inflation prints or a stronger labor market, that might get more officials on board at the next meeting or two. 

MARK: Well, Collin, we’ve also seen longer term yields rise. I think the last time I looked, the 30-year was about 5.2%, 30-year TIPS are around 3%, I think. Does it make sense right now for investors, bond investors to extend duration at this point? 

COLLIN: It doesn’t make sense just yet. We’re still in the camp that we think most investors should favor a below benchmark average duration. When we say below benchmark, we’re usually talking about the Ag that has an average duration of around 6. And when we look at the balance of risks, we see more risks to the upside than downside with long-term treasury yields. So we don’t think now is the time to be aggressively adding duration to portfolios, even though yields have moved up as you alluded to. 

We have increased our expected trading range for the 10-year treasury yield. Just prior to today or last week, we thought it would be in the 4 to 4-1.2% range. We’re raising that range by a quarter of a percentage point. I think it’s more likely it trades in the 4-1/4- to 4-3/4% range. A lot of that is really just due to the change in the expected short-term rates. If we look at the breakdown of the 10-year treasury yield over the past handful of weeks, it’s not necessarily driven by inflation expectations. It’s driven more by the expected short-term rate. And if the Fed hikes rates, even though it’s not our base case, we think the risk is rising. If the Fed hikes rates really just to offset the, quote/unquote, insurance cuts from last year, and just remove a little bit of restriction, and if the economy continues to remain resilient, that can put upward pressure on all tenors of the yield curve. And you add that in with inflation, that’s still elevated, but I think inflation uncertainty is elevated, we still have fiscal concerns around, and the general trend in global bond yields, and I think Japan is one example, if we see those yields continue to rise, that can put somewhat of a floor underneath our long-term yield. 

So now is not the time to be aggressively adding duration, but that doesn’t mean that you need to hide out in cash. There’s an opportunity cost if you sit in very, very short-term or ultra-short-term investments. If you look at T-bills near that Fed Funds Rate of 3-1/2- and 3-3/4%, compared to just the two-year yield at close to 4-1/4%, you’re missing out on income that you can earn now, with the potential that the Fed might just catch up over the next handful of months or quarters. And unless you expect the Fed to begin hiking aggressively and begin a new rate hike cycle, which is not our case right now, we think there are opportunities at the short end of the curve, say, two or three years or so. 

One final point on long-term yields, Mark. You mentioned TIPS, and the 30-year TIPS is at 3%. It’s pretty much an all-time high. It’s admittedly a very short history because TIPS were only introduced in 1997. We’re not suggesting investors aggressively add duration, but if you’re looking for some long duration investments, if it fits in with your clients’ needs, I think a long-term TIPS could be worth considering. With a 3% real yield, you hold that to maturity, you can outperform inflation by that real yield by 3%. And if inflation picks up, it can boost the nominal returns even more. So we don’t think it makes sense for a lot of investors, but if you have clients who are looking for long duration investments, and you’re figuring out what makes sense, a long-term TIPS could be a potential option. 

MARK: That’s the duration story, Collin. I want to talk a little bit about credit. Credit spreads remain near historically low levels, let’s say, but they have been widening over time, particularly recently. Is that a cause for concern? 

COLLIN: We don’t think it’s a cause for concern. We’ve seen a little move up in credit spreads over the past month, but they’re still historically low. If you look at investment-grade credit spreads, we use the Bloomberg US Corporate Bond Index, they’re actually down a basis point for the year. So up a little bit over the past few weeks, but down for the year. The High-Yield Index up a little bit over the past few weeks, but only up about two or three basis points for the year. We’re seeing a few key drivers of the increase in yields, kind of a little bit different in both markets. 

On the investment-grade side, tech bonds have been somewhat of a driver there, where we’ve seen higher spreads with tech issuers, specifically the hyperscalers. Because we’ve seen so much issuance, I think a lot of that comes down to supply/demand dynamics, and maybe the uncertain profitability outlook there over a long time horizon. So that’s weighed on the market a little bit, but underneath the surface, a lot of the other sectors are relatively well-behaved. 

And if we look at the move up recently in high-yield bond spreads, it’s almost exclusively driven by the lowest rate of the junkiest of the junk, you know, triple-C and below. And if you look at, say, double-Bs or single-Bs, their spreads are mostly flat for the year, but triple-C spreads are up 150 to 200 basis points. So that just shows there’s cracks well underneath the surface. When you invest or consider very low-rated bonds, like triple-Cs, they have risks in them. And given that we’re in this, you know, potentially higher for longer environment, I think investors are kind of rerating those investments, and how can they perform if rates and yields stay elevated over the long run? And that can have an impact there. But the good news is triple-Cs make up a shrinking share of the High-Yield Bond Index, and large chunk of the index these days is double-B-rated, and then to a lesser extent single-B-rated.

So not necessarily a cause for concern, and the absolute yields look attractive. If you look at intermediate-term corporates, you can get on average yields about 5% or more, above 7% for high-yield bonds. And notably with high-yield bonds, they have low durations. The average duration of the index is around 3. So when you consider high-yield bonds, that’s in line with our below benchmark, somewhat short-term average duration guidance. 

MARK: Last question for you, Collin, and then we’ll bring Kevin into the conversation. Relative muni yields rose in July. What drove that move and does it change your outlook on munis overall? 

COLLIN: It doesn’t change our outlook. We continue to have a favorable view on munis. We have seen relative yields pick up since we last met a month ago. So over the course of July, we saw the muni over treasury, or muni over bonds, the MOB spread, pickup. I think a lot of it’s just due to mean reversion. If we look at earlier points in the year, they were historically low, and so they’ve cheapened a little bit, but I wouldn’t characterize them as cheap when we take a longer term view. But if you look at, say, five- and 10-year MOB spreads, they’re close to their one-year high. So it means that it’s a little bit more attractive now to invest in munis than it was just a month or so ago. 

I think there’s two reasons why we saw the pickup. I think part of it, the move up in MOB spreads coincided with the move in 10-year treasury yields. So I think general investor unease, uncertainty, about the direction of interest rates. I think that flowed through to the muni market, where investors got a little skittish as well. But also supply demand dynamics. So our colleague, Cooper Howard, who is our expert on muni bonds, he’s talked about this as the year has gone on, that we’ve expected and seen this huge deluge of muni bond issuance. In fact, in the first half of the year, municipal bond issuance was its highest in a decade. So the question was can investors absorb that? Is there enough demand out there? And for most of the year it did, but now I think there’s questions of maybe demand fatigue, and can demand pick up with such high issuance. 

So our outlook hasn’t changed, in that fundamentals are still strong. What this means, I think, if you’re looking for potential opportunities for your clients, the effective tax rate matters. And with those muni over treasury relative yields picking up, it means that some of your clients have maybe slightly lower effective tax rates, munis might make more sense now than they did just a month ago. 

MARK: Thanks, Collin. 

Kevin Gordon, welcome to the show. Collin was talking about the Fed a few minutes ago, and you mentioned inflation, mentioned the labor market. Given the somewhat challenging inflation backdrop, that’s going to be more in focus for the Fed versus, say, the labor market. So what does that mean for policy going forward in your perspective? 

KEVIN GORDON: Yeah. Hey, Mark. Hey, everybody. Thanks for having me back on. I think that Collin nailed it when he said you have to have a low conviction view in Fed call at this point because when you do think about the inflation backdrop, and a lot of Fed members and FOMC members have talked about this, but so much of inflation today remains driven by supply shocks, as opposed to demand shocks. So fundamentally that makes it for a much more difficult and challenging environment for a central bank to be able to respond with it because with the only tool essentially being interest rates, it’s very hard to combat supply-driven inflation with just an increase in rates. 

But when you think about the fact that we’ve gone through these successive supply shocks over the past several years, if you want to take the three main ones right now, you have tariffs which are still with us. Those have been the longest lasting ones, dating back to April of last year, in terms of the aggressive increase. And then you have more in the medium-term sense, everything that has stemmed from this AI build-out. And then of course the ultimate wildcard this year, which has been everything related to energy stemming from the oil crisis in the war in the Middle East. So when you combine all three of those, it’s certainly putting a higher floor under inflation. But I think that the way that the Fed is assessing it, and we’ve heard this from the trickle of Fed-speak that we’ve gotten over the past several months, is that they want to see, number one, how much the energy-related inflation is temporary or not, meaning how much is it really going to contribute to a broader set of factors within core inflation? You’re seeing a little bit of that, but it’s sort of a stop and start nature in terms of the war. But I think also number two, everything related to AI, there is still this big bet, and Chair Warsh of the many things we didn’t hear from him, the one thing that you did hear about, and what he has continued to talk about is this relatively big bet on productivity that stems from everything related to AI investment right now. So you’re getting a massive pull forward in terms of the spend that is contributing to inflation. But I think the longer term outlook, at least from the way that the Fed sees it, is that you do have a productivity payoff from that story. 

But I think what you’re starting to hear from some officials, and the Philadelphia Fed President, Anna Paulson, was out this morning, talking about the fact that it’s only going to be so long until they can really wait to see if inflation starts to melt closer to 2%. And the longer you go without that, the more you risk having these supply shocks feed on themselves even more, and then keeping the Fed even further away from their target. 

So I think of the three factors, of course, energy is going to be the most volatile. That’s just due to its nature, but I think also due to the nature of what the conflict looks like. But even below that, I would pay attention to the fact that if you were to strip out anything energy-related and anything on the goods side of the economy, so taking out some of the impact from tariffs, you are still seeing a pretty broad base of inflation pressure at that core services level. And I think a lot of that, it’s not necessarily for a horrible reason. I mean, the economy continues to grow. A side effect of that tends to be relatively hotter inflation, but it really just comes down to, of course, how the Fed wants to battle that. And you’re starting to see a little bit of this sort of slow trickle of FOMC members that are at least starting to position themselves or get ready to position themselves to be a little bit more hawkish in nature. 

MARK: Kevin, I want to go back to the labor market. One of your themes this year has been labor market stabilization. And do you think it still looks stable? And if so, what are some of the things you’re looking at to see whether we might get some tightness or re-tightening soon? 

KEVIN: Yeah, so broadly it still looks stable, and that was confirmed by the job openings data that we got this morning through June. So now you’ve got six months worth of job openings, and hiring, and layoff data that comes from the JOLTS Survey. And what it showed is basically the same story that it’s been telling for the past several months, basically the past year almost, if you look at the openings rate, which ticked down a little bit, but has broadly been in this sideways move over the past year. But similar thing with the hiring rate, where you’re not really seeing a big pickup in hire activity, but you’re also not seeing any movement at all really in layoffs. So you’ve been in this, at an aggregate level, relatively stable backdrop where there hasn’t been a whole lot going on, but if you look under the surface, of course, certain industries at times have been going through bigger rounds of layoffs. The focus at the beginning of this year was of course at the federal level. The focus a couple of years ago was in manufacturing. We’re starting to see some healing in that sector. And then more recently in the past several months, there’s been some wobbles in services, but all of that has happened at different points in time. It hasn’t happened at once. Typically the at once is when you get a broad-based weakening trend in the labor market. So I think things remain broadly stable when you look at the headline aggregate data. 

Whether it starts to turn into labor market tightness, that is a bigger focus for us, especially as we start to see… or I should say continue to see this very low level of initial jobless claims, so layoff activity remaining low. But then at the same time, a pickup in some of the cyclical parts of the economy. And I would point to manufacturing, you know, the ISM manufacturing data that we got yesterday, it was relatively strong. You had a significant beat at the headline level, you had new orders strengthening, production really picking up, employment starting to hook up, and actually at its strongest in nearly four years. So you do have some signs and some signals that the output of that sector is beginning to pick up, and that tends to coincide with a broader pickup in the economy. So to the extent that on the employment side of things, if we do start to see that reflected in the non-farm payroll data where payroll starts to pick up at a healthier pace, then you could probably envision a scenario where unemployment starts to tick a little bit lower, and then eventually you get the follow-on of wage growth picking up. 

For now, we’re not necessarily seeing that. You also have real wage growth that is constrained by what’s happening in energy prices. So assuming that continues to be the case, it probably buys a little bit more time from a wage inflation perspective. But we would sort of keep that in mind now you’ve made more of this definitive turn in the cyclical parts of the economy, especially manufacturing. Historically, that tends to lead to some upward pressure on wages, but I use ‘historically’ sort of loosely because this is such a wacky and unique cycle relative to history. So you can’t rely too much on those historical indicators, but we will be watching for any hints of more wage inflation at the regional level as well. 

MARK: Yeah. And I think, Kevin, another thing we’ve seen this year is simultaneously we’ve got stronger business investment, but we’ve also got weaker consumer spending. So do you see that gap closing anytime soon? 

KEVIN: Yeah. Well, fortunately, when we got second quarter GDP, the initial estimate, and the initial read for it, rather, last week, you actually saw a pretty nice closing of the gap with consumption picking up and catching back up to business investment. It’s not necessarily the case that you should look for the same growth rates in both of them because business investment has been so strong, of course, led by equipment and the investment, and everything related to AI. So if you look at just the trend for consumption itself, there was definitely a nice pickup in the second quarter, and it was pretty evenly spread across goods and services, so it wasn’t necessarily geared towards or biased towards one part of the economy. So I think that was certainly a good rebound relative to the first quarter because consumers had been relatively constrained by what was going on in terms of the increase in energy prices. 

But at the same time, if you go into an environment, and you can envision one by the end of the year, where maybe you are seeing some monetary tightening if the Fed does turn a bit hawkish if they decide to raise rates, and then at the same time you go through a little bit of a tightening on the fiscal side, where you don’t have the big benefit of larger tax refunds that you had earlier this year, then you probably don’t have as solid of a consumer backdrop. You of course probably have the offset of a relatable labor market as I mentioned. But at the same time, if energy prices stay high, that probably crimps the spending ability a little bit […audio dropout…] for consumers. Because the longer that you have average gas prices staying above $4, which consumer probably starts to treat that as something that’s a little bit more permanent in nature. But I would note, and we’ve learned throughout this cycle that the consumer has kind of taken a back step and a backseat relative to business investment. That sort of impulse being stronger on the business side, we don’t really see that changing anytime soon. So as long as that continues to be the case, you probably still have a relatively healthy underlying, you know, sort of core GDP number. Even when you factor in consumption that has been a little bit weaker, that business investment is still doing a lot of the heavy lifting. 

MARK: Thanks, Kevin. Chris, so we heard Collin talk about the Fed and interest rates. Kevin was just talking about inflation, the economy, the labor market. Given all of that, I’ll just ask you a super open-ended question here. What are your thoughts on the equity market right now? 

CHRIS FERRARONE: Thanks, Mark. Broadly speaking, we continue to see equities as well supported here with solid underlying fundamentals. Economic growth is… economic activity is expanding across most major regions. And of course the AI investment cycle is giving us a boom in corporate earnings in a range of industries. So we think that fundamental underpinning remains. That said, we are seeing a shift in the investment environment coming from a few key areas. One, of course, which Collin and Kevin touched on, was the change in the monetary policy backdrop. Inflation remains elevated and we’re seeing a shift from an easing bias across most of the major central banks to a tightening one. And this has implications for future growth down the road. And asset pricing, of course, all else equal, a rising discount rate puts downward pressure on valuation. So definitely a key area to watch. And I think markets are beginning to price in some of the uncertainty relative to that policy backdrop and related to AI. At a very high level, we just witnessed one of the largest momentum reversals in the month of July that we’ve seen in the last 10 years, with some extreme market volatility in areas like software, semiconductors, and those markets with high exposure to tech. 

So as we look out through the balance of the year, we think global equities have support. Indeed, the S&P is hitting an all-time high right now, and it’s hitting that all-time high with cleaner positioning after the washout in those speculative positions that we saw last month. 

I’d say just on balance, while we see that pretty solid underlying fundamental support, we continue to advise against chasing some of these fast-moving speculative areas, as the volatility can be quite extreme as we just saw last month. 

MARK: Thanks, Chris. I would say probably the number one question we get is… just tons of questions about the impact on equity markets given the concentration at the top of the market cap standing. So what is your take on that? 

CHRIS: Yeah, I’d say as a very high level statement, concentration in and of itself is not necessarily a market risk. And when people talk about concentration in markets right now, they’re largely looking at the size of technology related to the other segments. But I think it’s important to note that the tech companies that have paused this increase in market capitalization have done so with very strong underlying cash flows. So that concentration has been well earned. It’s not just been a valuation-driven expansion. This has been a decade-plus of very strong underlying fundamental growth from the tech sector and some parts of the communication services sector. 

That said, the degree of market concentration that we’re seeing right now is close to record highs. And the share of the top 10 companies as a percent of the total market is also near historical highs. And so I think it’s important, particularly for investors who hold equities via broad passive index funds, that they understand this dynamic. One might think that because you own an S&P 500 index fund, that you’re well diversified across, well, 500 stocks. But those investors might not realize that 46% of that index is in just two sectors, and almost 40% is in just 10 companies. So that’s an important dynamic in and of itself. 

And I’d say what adds risk to this picture today is also the concentration in earnings growth that we’re seeing really in the same key sectors. Indeed, as we look out for the full year ‘26, almost half the expected earnings growth that’s coming from the AI investment cycle, and that’s going into tech hardware, it’s going into semiconductors, it’s going into some of those areas that have already seen very large increases in market weight. 

And I’d say the last part on this is that this is not just the US. These dynamics are very similar, if not more extreme in emerging markets. These dynamics are in Japan, for example. It’s not just a US phenomenon. And I guess the bottom line is that we have markets now that are overwhelmingly comprised of tech companies, and that are delivering half the expected earnings growth for broader global equity market. And that’s largely coming from spending by the largest of these tech companies. 

So there’s a bit of circularity there. And I think the key concerns are around this AI investment cycle, and if it proves to be more drawn out than investors expect or does not deliver the returns on investment that is being discounted by markets, then we could see a broad repricing. And I think that’s the key risk today. 

MARK: Chris, last question for you, and then we’ll start taking some of the live questions that people have submitted. Chris, I wanted to drill down on that last point a little bit. How can investors increase diversification when global equities are so concentrated? 

CHRIS: Yeah, this is a question that we’ve been getting a lot, and we’ve been putting a lot of work into it. The good news is that it’s really relatively simple to increase diversification in a global equity portfolio today. And largely that’s because what has driven that concentration has been relatively narrow. So we can look at ways to diversify via regional allocations. We can do so via sector exposures. We can also look at factor diversification. And just give you a couple of examples of that, on the regional side, Europe, Canada, Latin America, those regions have very low exposure, relative exposure to tech in this AI cycle. On the sector side, we’ve looked at correlations across industry groups to the overall AI spend and the tech sector, and such as energy, consumer stables, healthcare, all have pretty low correlations there. When we talk about factor diversification, really looking at small- and mid-cap indices, which are much more broadly diversified in terms of sector and industry exposure. And then there’s factors like value and dividend growth and quality that also can increase diversification.

I’d say one other piece is, and in fact, this is pretty timely given what we saw last month, is looking at different alternative indices that are constructed with different underlying methodologies. So most major indices are constructed via market cap, but you can also look at equal-weighted indices. And the S&P 500 Equal-Weighted Index actually was up over the month of July, despite all the volatility that we saw in the cap-weighted indices. 

So there’s a lot of ways to increase diversification in global equity portfolios, and we think actively doing that improves risk-adjusted returns as we look forward. 

MARK: Thanks, Chris. 

Let’s see, Kevin, I’m going to send this one to you. ‘Do you anticipate any macroeconomic shocks in the next six months, like for example, the oil supply that can tip the US economy into recession?’ 

KEVIN: Well, in terms of energy supply, so we’ve learned so far this year that number one, coming into this year, oil supply and stockpiles around the world, it was pretty healthy. So the drawdown across the world, not just in the United States, has certainly been a cushion for energy prices not going higher than they were. Not to say that they did not go high. 

I think when it comes to energy prices and their impact on the US economy, and I want to stress US versus the rest of the world, our issue for now is really not one of energy shortages, physical shortages. It’s really one more of prices. Not to say that that doesn’t matter, of course, but when you think about that and the fact that we’ve had this relatively strong offset of a labor market that has continued to stabilize, plus the fact that over the past three to four decades, the share of spending for US consumers on anything energy-and specifically gasoline-related has come down from almost a peak of 10% to low single-digits. So we’ve gone through this secular trend of everyone sort of shifting away from a good chunk and a solid chunk of spending being devoted purely to energy and towards other things. That has not coincidentally occurred with less of a manufacturing bias in the US, more of a services bias. I mean, that’s one of the reasons that you sort of have the economy that’s been cushioned relative to… you know, cushioned against a recession. 

So I think for me, most of it sort of boils down to at the most basic or fundamental level, the strength of the labor market. So if you don’t see a significant pickup in jobless claims, if you don’t see a pickup in layoff activity at the broad aggregate level, then I think it’s harder to make that recession call. And for what it’s worth, if you look at an array of labor indicators that we track, everything from payrolls to the unemployment rate, to job openings, to claims, in the post-pandemic era, it actually has been claims that have been the best one to rely on, and they’ve given us that strongest signal for labor. Even last year when non-farm payroll growth was averaging towards zero when we got into that danger territory in the fall, that of course would have told you that we were probably looking at a recession arriving pretty closely behind it. But if you were looking at the claims data, it wasn’t necessarily corroborating that and backing that up. So that’s been really the data point to focus on, and give a little bit more… you know, I would say give a little bit more of a bias towards in this cycle. 

MARK: Thanks. Thanks, Kevin. 

Collin, this one is for you. ‘Collin, define your concerns regarding the large spike in AI hyperscaler credit default swaps.’ 

COLLIN: Yeah, that’s a good one. I do have some concerns. A lot of it stems from just the massive issuance we’ve seen from these hyperscalers, and the impact it’s having on the bond market. I mentioned this before, that we’re seeing tech spreads, specifically hyperscaler spreads move up, pulling the average OAS of the overall index with it. And there’s really two concerns that I see when I look at all this huge amount of hyperscaler issuance. One is simply just supply and demand dynamics. The numbers truly are staggering. And the question is will there be investor fatigue? And will investors continue to step up when we get these $25 billion bond deals that come from a given issuer, or whatever the number might be? And if not, does that result in even higher yields or higher spreads to attract that marginal buyer? So that’s the one concern we have. 

And then the second concern is really that long-term concern. What is the profitability over the long run? And are these companies going to make the money back to repay this, again, truly staggering amount of debt that’s been issued? So there is a concern there. We don’t think it’s enough that is going to significantly impact the investment-grade market as a whole. In fact, when I provided our overview before, I may have left out the fact that we do have a more favorable outlook on investment-grade corporate bonds, preferably those with lower durations, because generally speaking, we think the health of corporate America is generally strong. They have strong balance sheets when you look at it from an aggregate basis. As we know from the stock earnings story, earnings are very strong, corporate profits are high, and that high level is supportive of corporate bonds over the short run. Obviously, it might be more of a risk if the actual earnings don’t meet expectations, it might be more of a risk for the stock market than it is for the bond market because as long as they’re making enough money and seeing their earnings grow, they should remain current. 

So kind of tying that all together, it is a concern. We wouldn’t necessarily suggest investors go all in or something like that on tech bonds. Be cognizant of diversification. Be cognizant that a lot of these issuers tend to have somewhat high credit ratings. A lot of them are single-A or above. But what’s the longevity there given how much debt issuance we’ve seen? So we’re generally favorable on investment-grade corporates, but there clearly are risks with the tech sector, and specifically hyperscalers. 

MARK: Thanks, Collin. 

Some of you took the opportunity to submit questions when you registered for the webcast, and here’s one of those. I guess I’ll send this to both Chris and Collin. ‘What are some of the warning signs in both fixed income and equity markets that the federal debt issue is a problem, and how might both markets respond, and how quickly will markets react?’ So Chris, why don’t you start and Collin, you can finish up?

CHRIS: […audio dropout…] at a range of asset classes to get a clear picture here, certainly on the fixed income side, which I’m sure Collin will address, but also in terms of commodities, gold is clearly an indication there. And how that shows up broadly in the equity market in an environment that likely sees a tightening of financial conditions and widening credit spreads is a greater discernment between high and low quality, less speculative willingness or risk appetite in equity markets, and the outperformance of less yield-sensitive plays is just an example of a range of factors that we’re looking at when we’re thinking about the implications of fiscal stress. 

MARK: Collin, go ahead and take it away.

COLLIN: Yeah, on the bond side, there’s a few things we would be looking at. First, would just be the general auction results. And considering we’re in an environment right now where yields are elevated, not necessarily at their cyclical highs, but elevated relative to history, we started to see some weak auctions that suggest that there could be some sort of concern from the fiscal side of the equation, credit risk side of the equation. We also like looking at foreign flows. We get this from the treasury, the Treasury International Capital Data, or TIC data, comes out every month. Usually there’s a six-week lag or so, but it gives us insights into who holds treasuries among other things. It gives us a look at corporate bonds, foreign ownership of equities as well. But we like looking at the treasury data. We can look at individual countries, we can look at flows, whether it’s net buyers, net sellers. And one thing that we’re paying attention to are those foreign flows. Because as we continue to issue more and more debt, we need to find those buyers. And there’s been this concern that maybe foreign buyers won’t be stepping up. That’s not necessarily the case. Foreign official buyers, mostly central banks, they’ve been holding their bond holdings steady for a number of years. We’ve seen private investors pick up the slack. But the private investors I think are the ones to watch because they’re much more price-sensitive, and cognizant of what’s the actual opportunity for me as an investor, not just reserve currency purposes or liquidity, what’s my opportunity here? And if there are fiscal concerns, credit concerns, and we start to see foreign private investors step away, that could be a concern. 

And then finally, what’s driving treasury yields? And right now I mentioned we know that treasury yields are elevated. If we were to see the level of yields kind of diverge from what economic fundamentals would suggest, that could be a cause for concern. So let’s say we have the 10-year treasury yield near 4.7% or so right now, the 30-year above 5%. If we start to see inflation and inflation expectations decline, yet we see nominal yields stay elevated, that could tell two stories. One could be that growth is okay, but another is that investors are demanding higher yields to compensate them for the fiscal concerns out there. So those are the three things we would be looking at. 

MARK: Great, thanks. Thanks, Collin. 

Kevin, this one is for you. ‘What is the bigger risk right now for the US economy, rising inflation or slowing economic growth?’ 

KEVIN: I would say for now, probably more on the inflation side. Not a glaring overweighting to inflation, but I think from an economic standpoint. Of course you have the circular financing and circularity nature of AI that Chris was alluding to, so of course that stands as a risk to the business investment side to the extent you get a little bit of a pullback in investment. But beyond that, you still have a relatively wide base of growth. So I think that considering the fact that the labor market remains in its current state, as I mentioned earlier, we have seen the stabilization, the stock of payrolls continues to climb and inch towards new all-time highs every single month. So I think as long as you have that dynamic, it keeps that month-to-month consumer spending engine in place. So it’s pretty hard to see a broad slowdown as long as that’s the case. 

On the inflation side of things, I do still think that’s where more of the risk is, especially to the point I think around expectations around what policy is going to look like, and how it responds to inflation. And I think that was evident in some of the reaction from markets that you saw to last week’s Fed press conference, where you were seeing… across asset classes, you were seeing a relatively negative response from the equity market, the short end, the long end of the yield curve, also the dollar moving lower. That to me, I think, would exacerbate some of the issues that already exist within the inflation backdrop. 

MARK: Thanks, Kevin. 

Chris, this one is for you. ‘In your opinion, would a 5% yield on the 10-year treasury bond pose a significant challenge to US equity valuations?’

CHRIS: Generally speaking, I think the answer is yes, a move up to 5% would pressure equities. In fact, I made this comment earlier, is all else equal, a rise in interest rates is… you know, it’s an increase in a discount rate, and should be… you know, theoretically impacts markets via that mechanism. I think what more practically, and particularly from today’s perspective, is what’s been driving yields higher? And so far, yes, inflation has been above target for several years now. But outside of the spike we saw earlier in the year related to Iran, inflation hasn’t been steadily increasing. If anything, over the last couple months we’ve seen things come down. It’s been the growth side that’s been lifting yields as well. So I think that trade-off between growth and inflation is going to be important. We’re only 30, 40 basis points away from 5%. So it’s not like a massive move at this point, but as we start to hit those sorts of levels, it does feed through to credit lending conditions. Obviously, the cost of capital in general, and, you know, should… you know, my estimation is a good weigh on equity valuations. 

MARK: Thanks, Chris. 

Collin, this one is for you. ‘Are California municipal bonds attractively valued? If yes, where are the sweet spots on the yield curve?’ 

COLLIN: You know, I wasn’t prepared for that question. I don’t have specific comments on California. I’ll have to phone a friend, and check with Cooper Howard when he gets back. But I do have thoughts on the general, the muni yield curve, because I haven’t looked at the California yield curve specifically lately. But what we’re seeing with relative yields… and that’s usually what we want to look at, you know, what’s the attractiveness of munis relative to a taxable alternative to give us an idea of what sort of effective tax rate makes the most sense for munis? It tends to be positively sloped. So you tend to see the lowest relative yields with short-term munis, and then they increase as the maturity increases as well. So what that means is the very short end, sometimes munis might not make the most sense. They probably do for your clients that are in the top tax brackets, but if you’re in some of the mid-range ones, they might not make as much sense. And then as you get slightly longer, that’s where munis usually have more of an advantage. 

So it’s an interesting way to look at how to position your clients’ portfolios. There’s not a one-size-fits-all approach. You can have a mix of taxable and tax-exempt, depending on that yield curve slope. So maybe taxable at the short end, again, depending on your client’s effective tax rate, and then maybe consider more munis once they get a little bit more relatively attractive when you consider more intermediate- and long-term maturities. 

MARK: Thanks, Collin. 

Let’s see. Chris, this one is for you. ‘Beyond South Korea where we could argue there has been a major retail capitulation event, the selloff in the US when we’ve had those have been pretty orderly. Do you believe that capitulation is more often than not a necessary event to finding a major bottom?’ And then second part of that, ‘Given the generational AI CapEx spending and related debt, the massive growth of some of these single-date options and leveraged ETFs, do you believe our markets need some sort of capitulation moment to move forward?’ 

CHRIS: To answer that quite directly, is capitulation a necessary condition for a major market bottom? Historically, the answer is yes. Most of major market bottoms, we’ve seen various levels of capitulation. Of course, I think that begs the question, what is capitulation? How are you defining that? How do you know when you might see it? I think there are a range of things from the more speculative end of the spectrum to the more fundamental end that are indicative of that. On the more speculative side of things, it’s sentiment measures, hedge fund positioning, overall market leverage, margin debt, things like that. Indeed, in July, we saw one of the largest monthly de-grossing events on the hedge fund side that we’ve seen in the last 10 years. So we’re starting to move that way, at least in the speculative end of the spectrum. 

But on the fundamental end of the spectrum, capitulation looks like major reductions in equity allocations while only fund managers and from households. It looks like tightening of credit conditions, a general unwillingness to lend. And just a general, we see a full range of investors fleeing towards the exits. And that shows up in sentiment measures. It shows up in market breadth measures. It shows up in surveys of lending conditions, sharp downgrades to earnings and economic growth. That’s how I define capitulation. And that is what we have seen, at least in the majority of those things in most major market bottoms. 

So the next question is have we seen that so far? Does that need to happen given what is going on? I think the answer to have we seen that is no. We’ve seen a little bit of the froth come out of the speculative end of the market last month, but we haven’t seen really any shift from the long side and the underlying fundamental side. It’s quite intact. 

You know, does the AI story have to blow up or unwind to see a major market bottom? I think that depends on how this investment cycle transpires. Is the 750 billion in CapEx being spent and the trillion expected to be spent next year? Is that productive investment? Is that going to generate a return that’s going to meet market expectations? I think that remains an unanswered question. To the extent that it does, I don’t think you need a major economic capitulation from the AI investment cycle. But again, history is a tough judge, and some of these innovation cycles result in step functions higher in economic activity and market trends. And some end up seeing a pretty severe bout of volatility and a change in leadership. So I think it’s a pretty binary outcome at this point. And unfortunately, I think that’s a question, you know, it’s going to be difficult to answer. Indeed, it’s difficult to answer even for the hyperscalers who are spending all this capital. 

MARK: Thanks, Chris. 

Kevin, a couple of questions for you. ‘How vulnerable is the US economy to the ongoing turmoil in the Middle East, as well as ongoing fluctuations in the price of oil?’ 

KEVIN: So yeah, less vulnerable than certainly other parts of the world. I mentioned earlier, you know, sort of the energy shortage issue that a lot of other economies face. So that’s certainly more acute in Europe and Asia. Europe in particular is probably going to face the biggest risk from that. You saw some fresh inflation data coming out of the Eurozone, in particular Germany, much higher than expected. Probably brings some of the discussion for the European Central Bank of having to maybe consider tightening policy again, just because of another round of energy prices sort of putting upward pressure on prices broadly for that region. But for the US, yeah, I mean, I think that, of course, we’ll go through a lot of volatility for oil prices where we’ve been living that for several months now. Last I checked before we hopped on this webcast, Brent crude was back to touching $80 a barrel. So it still is going to be more of a price issue here and a shortage issue outside of the US. 

But I think broadly, the key thing to keep in mind is really at the end of the day, that linkage back to what companies decide to do when it comes to labor. So do costs go up enough on the energy side and on the input side to where they have to sort of make the decision to let go of people? And there’s enough leading indicators that we can look to for that to be the case if it was going to be the case. And so far that hasn’t necessarily panned out. So again, I think it’ll probably happen, if it does. You know, for now at the sector and the industry level. It doesn’t necessarily look like it’s going to filter up to the broad economic level right now. 

MARK: Thanks, Kevin. 

Collin, this one is for you. ‘Any thoughts on the coordinated yen defense last week? Is this a risk for the future of the carry trade?’ 

COLLIN: Yeah, that’s a great question. So we’ll start with the latter part of that question. Is it a risk to the carry trade? I’d say in a vacuum it is. We’re not sure what the sustainability is here, how long this coordinated effort will last, but if it’s meant to stem the decline or reverse the decline and lead to an increase in the yen, that in and of itself poses a risk to the carry trade. We always get questions on the carry trade, how to quantify the exposure there? What does it look like if they were to get unwind? It’s really tough to tell, but I’d say in a vacuum, it is a risk. 

I think looking ahead, the outlook is very uncertain. I think there’s a lot of questions as to the why this happened. If you look at Japan, you’re seeing a weaker yen, I think due to just interest rate differentials. The Bank of Japan, while it’s been tightening very slowly, very gradually over the past two years, still is at a major disadvantage to other developed market bond yields like the US. So I think that weighs on it. There’s concerns or headlines about the fiscal position. But I think it’s more about interest rate differentials than the fiscal policy of Japan at this stage. And I think the question is what’s the longevity here? Will the US continue to coordinate with Japan, and stem the move? So I think the hope is that the signal and the initial move last week can stem the decline, but how the next few days or weeks plays out I think will be important to see if the decline will resume or if this can actually instill confidence in the end. 

MARK: All right. Thank you very much, Collin. 

Let’s go to the final question here. This is for each of you. What is the one thing you want viewers to take away from your comments today? Why don’t we start with you, Kevin, then we’ll go to Collin, then we’ll go to Chris. So Kevin, take it away. 

KEVIN: Sure. So I would say in terms of inflation, and keeping an eye on that as a risk, I think what’s important to keep in mind is before you had the energy-related disruption this year, you were still seeing a relatively wide base of inflation pressure on the services side of the economy, which of course has been keeping overall inflation just given the weight of services elevated. And then you add into that the knock-on effects from energy. And you do have a pretty, I would say, less favorable outlook. So certainly one that the Fed is going to have to combat sooner rather than later, assuming it stays this way. To assume we get two more inflation prints like we did in June, I think is a pretty lofty assumption, especially with what has happened recently with oil prices. So I would keep in mind that wider base of inflation pressure, and the fact that you do have some potential maybe by the end of this year to see some signs of wage inflation maybe reasserting itself a little bit, but of course we’ll have to take our cue from the Jobs Reports, the key one being of course this Friday when we get it for July. But I think that that wage component is going to be a lot more important and potentially dominant as we turn into the next year. 

MARK: Thank you, Kevin. 

Collin, take it away. 

COLLIN: Yeah, I can keep mine pretty short and sweet, Mark. I’d say don’t let the Fed headlines and the potential risk of a hike or even two, depending on the Fed Funds Futures market, don’t let that dictate what you’re doing with your clients’ portfolios today. We find that a lot of individual investors, they hear the potential for a rate hike, and think they should just sit on the sidelines and wait for that to happen. But we see opportunities that are attractive now, specifically with short- and some intermediate-term bonds. So rather than waiting for a rate hike that may or may not come, we think there are attractive yield opportunities right now. 

MARK: Thank you, Collin. 

Chris, bring us home. 

CHRIS: I’m going to reiterate really Collin’s messages here, is that there’s a lot of uncertainty out there, a lot of uncertainty related to AI, related to inflation, related to policy, but the fundamental underpinnings that generally support equity markets remain intact. That said, there has been a lot of speculative activity. Valuations are elevated and expectations are elevated too. So those factors keep us from wanting to chase or to increase risk here. But at the same time, the fundamental underpinnings are there that we advocate sticking to strategic allocations at this point. 

MARK: Thank you. Thank you, Chris. 

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