MARK RIEPE: Welcome, everyone, to Schwab Market Talk, and thanks for your time. The date is March 4^th, 2025. 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, and we’re going to be starting out by talking about some of the top themes that are on the minds of our strategists. We’ll be doing that for about 30 minutes, and then we’ll start taking live questions. If you want to ask a question, you can just type the question into the Q&A box on your screen, and then click Submit, and you can do that at any time during today’s event. For continuing education credits, live attendance at today’s webcast qualifies for one hour of CFP and/or CIMA continuing education credit if you watch for a minimum of 50 minutes. That means if you watch the replay, you aren’t eligible for CE credit. To get CFP credit, please enter your CFP ID Number in the window that should be popped up on your screen right now. In case you don’t see it, don’t worry, you should see it again towards the end of the webcast as well, and then Schwab will submit the credit to the CFP Board on your behalf. For CIMA credit, you’re going to have to submit that on your own. Approximately 50 minutes after the show started, the directions for how to submit will be found in the CIMA widget that will be appearing at the bottom of your screen. Finally, I wanted to call your attention to a couple of resources on the webcast console. In the top-right, you’ll see a link to our new Behavioral Finance Playbook for Advisors, and in the bottom right-hand corner, you’ll find a link to our latest market commentary, a chart on municipal bond yields, and a link to register for our Advisor Trading webcast.

So let’s get to our speakers. We’ve got Mike Townsend, Managing Director in our Office of Legislative and Regulatory Affairs; Liz Ann Sonders, our Chief Investment Strategist; Jeffrey Kleintop, our Chief Global Investment Strategist; and Kathy Jones, our Chief Fixed Income Strategist.

So let’s start out with you, Mike. Last week, the House approved, I guess what you would call an outline for the president’s big policy agenda, including tax cuts and spending cuts. Tell us a little bit about what’s next in the process, and I think especially important for this audience, when do you think we’ll get more clarity on the tax situation?

MIKE TOWNSEND: Sure, Mark, and good morning, everybody. You know, where we are now, the end goal here is to use a process called budget reconciliation to pass the president’s policy agenda. Budget reconciliation is a parliamentary process. It’s used when one party has full control in Washington. Expedited procedure to pass budget bills, basically. Limited debate time, limited amendments. Most importantly, it can be passed with a simple majority in both the House and the Senate, and that’s key because it can’t be filibustered in the Senate. You don’t need that 60-vote super majority. Not at all an unusual process. It was actually the process that was used in 2017, when the Republicans had full control to pass the Tax Cuts and Jobs Act, which of course is the catalyst for the tax debate this year because all of those tax cuts are set to expire at the end of the year. It was used by Democrats in 2021 and 2022 to pass the American Rescue Plan and the Inflation Reduction Act. So very common process.

The first step in the process is that both the House and Senate have to pass the same budget resolution, which as you’ve mentioned is just kind of a blueprint. It contains the overall spending and revenue targets, but no details. Last week, the House passed its version. It includes space for $4-1/2 trillion in tax cuts, $1-1/2 trillion minimum in spending cuts, $4 trillion debt ceiling increase. But the odd thing here is that the Senate has passed a much more targeted budget resolution, totaling just $340 billion in energy, border, and defense policy. Senate’s plan was to use a second bill to then deal with the big tax cuts and spending issues. But ultimately, they have to pass the same thing, so I expect later this month the Senate will take up the House version. We’ll see if they can pass it. It may have to go back to the House if they amend it, but eventually they’re going to have to start the very difficult process of figuring out the actual spending cut and tax provisions.

In terms of when we’ll know about taxes, the House Ways and Means Committee is actually going to start next week with two days of meetings trying to outline what their tax cuts will be. I think it’s going to take weeks, probably months to get everyone onboard with a plan. Mid-year is probably best-case scenario. It would not shock me if it was not until the fall that we got a resolution. I do think it remains highly likely that all the expiring provisions do get extended. I think the tougher question is what happens to all the things the president talked about during the campaign? No tax on tips. No tax on Social Security benefits. No tax on overtime hours. You can’t probably fit them all in, so you’re going to have to pick and choose. The other one that watches the SALT deduction cap. Both the president and key Republicans want to see that lifted. It’s a huge priority for people in California, and New York, New Jersey.

So bottom line, a ton of moving parts here. It’s going to take a while to get all the details ironed out, and be able to pass a gigantic bill through both the House and the Senate. It’s going to take a while.

MARK: So Mike, while that process works out, we, next week, I believe, there could be a government shutdown. So two-part question, what are the chances of that actually happening? And then secondly, historically, government shutdowns haven’t been really big market-movers. Do you think this time will be different?

MIKE: Yeah, the agreement reached back in December funds the government just through next Friday, March 14^th. So if Congress doesn’t pass an extension, a shutdown would begin on the 15^th. Right now, I’d say the odds of a shutdown are steadily rising. Republicans are planning to put forward what’s known as a continuing resolution, keeps the government funded through the end of this fiscal year, which is September 30^th. Democrats are not likely to support that. Really, I don’t think they’re in much of a mood to support anything that helps out the Republicans right now. So that would mean that the Republicans can only lose one of their members in the House given how narrow the margins are. Given that more than 30 Republicans voted against the extension of funding back in December that got us to here, I think it’s going to be hard to get them all on the same page. And then in the Senate you would need at least seven Democrats to join with all the Republicans to make a 60-vote super majority because this one you would need a 60-vote margin. So I think that’s going to be difficult. I do think Democrats are in a tricky position here as well. They don’t really want to shut down the government, given everything else that’s going on in Washington. So it’s possible some kind of deal could come together at the last-minute next week. As you mentioned, historically, it’s not a big market mover. Actually, the S&P 500 has gone up over the last eight shutdowns. The most recent one was the 35-day shutdown from late December of 2018 to late January of 2019. That was during the first Trump presidency. The market actually went up by over 10%. So you can make of that, I guess, what you will.

I do think the unknown here is whether a government shutdown just sort of adds pressure to the markets, in the sense that the markets are trying to absorb so much news and so many policy developments right now that, you know, shutdowns just sort of adds to the level of uncertainty and chaos, and may just kind of contribute to what’s going on in the market. We’ll have to see how it plays out next week.

MARK: Thanks, Mike. We’re in the second month of the so-called extraordinary measures being taken to keep the federal government debt below the statutory debt ceiling. What do you think? Is there a risk of default when we reach the end of this process, probably sometime in June or July?

MIKE: Yeah, important to remember, first off, that the debt ceiling, different from the government shutdown, often gets conflated by clients and investors, but they’re two totally different things. The debt ceiling, of course, is the cap on the total amount of debt that the United States can accumulate, and we hit that ceiling back in January. So the Treasury is using cash on hand to pay the bills. They’ve started extraordinary measures to make sure that US doesn’t default on its debts. That’s a finite process, as you point out. So we’re also in tax season, so that will bring in additional revenue that can be used. So as you said, we’re probably talking June or July before we really get to a crisis point on a possible default.

You know, historically, Congress has always managed to raise the debt ceiling when push came to shove. We got really close in 2023 to defaulting, but ultimately a deal was cut. So looking at history, I’d say congress always finds a way. But that said, given the dynamics in Washington, I’d say I’m more worried about it than maybe at any time I have ever been. Republicans did include a debt ceiling increase in their budget bill. So that says they’re certainly aware of it. I don’t know if that budget bill will be done in time for the debt ceiling deadline, so then you might have to break it out on its own. That could be a difficult vote. You know, we will have to see how it plays out. But unlike government shutdowns, which historically have not impacted the markets much, debt ceiling worries do impact the markets, and could add to volatility as we get towards that end game.

MARK: Alright, Mike, last question for you, and then we’ll bring in Liz Ann into the conversation. I think something like a hundred executive orders have been signed. You know, some of them got a lot of play in the mainstream media. Are there any, though, that have been flying below the radar that you think investors should be paying attention to?

MIKE: Yeah, I’ll mention two. One is this executive order to create a sovereign wealth fund that’s being studied now. The order directs the treasury secretary and the commerce secretary to deliver a plan by early May on how to create one here in the US. You know, normally, sovereign wealth funds are held by countries that have big budget surpluses, which we definitely do not have, usually from big natural resources. You know, think Saudi Arabia and Norway come to mind. They have sovereign wealth funds from big oil reserves. On the other hand, France has a large budget deficit, a large trade deficit. It has a sovereign wealth fund that invests strategically in emerging technologies and such. There’s not really been a clearly articulated vision yet for a US sovereign wealth fund. It sounds like there will be in the next couple of months. So I do think that’s worth keeping an eye on.

The other one that then maybe hasn’t received as much attention as maybe it ought to is one that goes at the independence of regulatory agencies, particularly the SEC and the Fed. The executive order basically says that these agencies have to submit their rule proposals, anything that they plan to, the White House, and can cut their budgets if they pursue, you know, efforts at enforcement or regulation that don’t align with the president’s goals. You know, that kind of flies in the face of how independent agencies are supposed to be… well, they’re supposed to be independent. I would note that the Fed’s monetary policy responsibilities were specifically carved out of that order, but its bank supervision policies responsibilities were not, which creates kind of an odd universe in which the Fed is sort of partly independent and partly not so independent. For RIAs, I think it’s more evidence that we can expect an SEC that is not likely to pursue a burdensome regulatory agenda over the next couple of years. But I do think it creates this kind of larger existential question about whether the administration… sort of how much influence the administration can exert over these types of agencies that were specifically created by Congress. I actually think this will end up in the courts, and that the administration wants that court fight, they want that to be argued in court and determined. So that’s going to be really interesting to watch in the coming months.

MARK: Alright, thank you. Thank you, Mike.

Liz Ann, we’ve got a couple questions to you. These are actually submitted as part of when people registered for the webcast, so I’ll kind of pair them together. What impact would federal employee layoffs have on the chances of a recession, and do you think the planned reduction in government spending may, in fact, cause a recession?

LIZ ANN SONDERS: So in and of itself, if you’re just looking at the DOGE spending cuts, what’s happened already, what you can attempt to estimate based on what we hear, plus the commensurate layoffs with federal government employees probably doesn’t lead to a recession. There’s 2.2 million federal government employees. It goes to about double that if you include the uniformed military, but we’re not expected to see any significant cuts there. And that’s out of a total workforce of 160 million. The problem is the ripple effects, not just into things like contract workers. So for every one federal worker, their estimates range from between two to three government workers. You add in the DOGE spending cuts that are inclusive of grant-based cuts, sometimes those filter down to the state and local level. So if that starts to pick up, then you have to look at the overall amount of hits to the government, both the federal side and the combination of the state and local side.

You’ve got the impact through the confidence channels, which we are already seeing. We’re seeing it in the soft economic data with the decline in consumer confidence, a lot of other soft economic data, survey-based data, small business confidence coming down, capex spending intention plans picking up. You’ve even seen it in some of the hard data now. So it is hard to just isolate federal government layoffs and its impact on the economy. Not enough mathematically to be recessionary, but it’s the culmination of all of this, as well as just the broad uncertainty factor, and now that it’s filtering not just in the soft data, but into the hard data, which is why… and this has gotten a lot of attention… the Atlanta Fed’s GDPNow, which is a nowcast, it’s not a forecast, it’s tracking data that feeds into GDP as it comes in. So we have in the bag, not with all the data yet, but we have in the bag the first two months of the quarter, and as the data continues to come in, we’ll get closer to an actual GDP number, but that dropped to negative 2.8% for the first quarter, and that’s based on the actual data that has come in, not expectations thereof.

MARK: So yeah, that kind of anticipated my next question about some of that more recent data coming in. What in particular are you going to be paying attention to in the coming weeks as the quarter ends up?

LIZ ANN: So I think a lot of the employment data is important. We start to get a sense of some weakness creeping into weekly data like initial unemployment claims, and I think it’s going to be increasingly important to look at the state level. You can look at claims in the DC area proper, but also Maryland and Virginia, and the impacts that we’re starting to see there. You’ve started to see accelerating claims already to see whether that persists. Of course on Friday, we get the Jobs Report, and we’ll see how much of that has started to filter into payrolls, the unemployment rate, hours worked, etc. But we have seen weaker consumption, where we got retail sales that were weaker than expected, but also the latest update to GDP for the fourth quarter showed more of a decline in consumption. So we’re starting to see consumption-based measures be part of what is bringing estimates down for first quarter GDP. We saw a little bit of weakness in industrial production, a pretty significant weakness showing up in housing, notwithstanding the decline in mortgage rates, which all else equal, should help some of the confidence measures tied to housing, not to mention sales measures. So there’s definitely been a pullback in activity. We’re seeing it in capital spending intentions and plans. And so those are where we’re starting to see pockets of weakness.

But to the question of what are you keeping an eye on, I think the labor market data is really key because even in the face of what generally has been the decline in excess savings from the stimulus era, combined with the actual savings rate, although which popped up, which could reflect some uncertainty, and the decision to pull back on consumption, which we have seen, could start to filter into some of the estimates for first quarter GDP. So we are starting to see it in the numbers, and at least in the near term I wouldn’t expect that to change. Then you have the added uncertainty of Fed policy. The move down in yields has been driven by weaker growth and weaker assumptions about growth, not a deceleration in inflation. That is the sort of negative perspective around declining yields. And I’ll explain why the stock market has been weak alongside declining yields because that’s reflecting those weaker growth assumptions. So also keeping a close eye on the bond market, we’ve had their renewed inversion of the yield curve as a tell on where we stand with economic growth.

MARK: One more question… well, actually, a pair of questions again for you Liz Ann, and then we’ll bring in Jeff. Are equal-weighted ETFs… how do you think about those compared to cap-weighted ETFs, and what are your thoughts on, you know, all this policy uncertainty that you just were referring to? What are your thoughts on sort of the Mag 7 as a group these days?

LIZ ANN: Well, the Mag 7 has clearly been a group of underperformers, unlike last year, where only one of the Magnificent 7 underperformed the S&P. It was Microsoft, but it still had double-digit positive returns last year. So all seven stocks did quite well. Kind of the mirror image this year. You’ve got only one stock that’s outperformed the S&P, that’s Meta. But it’s ranked as of last night’s close, 81^st out of the 500 stocks, and the next best performer is ranked somewhere around 370. And then you’ve got Tesla bringing up the rear through the day before yesterday’s close was the worst performing stock. Now it’s the second worst performing stock. So that has dragged down in relative terms, the cap-weighted performance of the S&P 500, which as of intraday today, those who haven’t looked, it’s not a great day today, has brought the index level, the cap-weighted index level decline to about 7% right now. You have a more mild decline in equal-weight because it’s not weighted down by the impact of those stocks.

So those stocks are declining a little bit as a share of the S&P, but they’re still pretty powerful drivers. So we’ve been getting that question a lot, equal-weight versus cap-weight. Sometimes I get it, you know, ‘Do you think equal-weight makes more sense?’ or some index version of the S&P, excluding the Magnificent 7? And the way we’ve answered that is the one thing to be mindful of amid all these rapid-fire sector rotations and leadership shifts that there will be leadership shifts at times back into those names, even if in the aggregate on a year-to-date basis they’ve been drags on performance. So it is arguably a little bit bigger a risk to go cap-weighted, but excluding the Magnificent 7. Equal-weight is probably the better way to go. It is outperforming on a year-to-date basis, so you get a little bit more smoothed exposure to the overall index without the concentration risk that comes with taking that cap-weighted approach. But you also take maybe an equivalent risk of not having any exposure to those names by taking an ex Mag 7 approach.

So I think equal-weight at this point is probably the best way to go. And we are seeing broader participation. If you look on a rolling one-year basis, depending on whether you look at number of trading days or in calendar year terms, you only have somewhere between 20- and 30% of S&P stocks that have outperformed the index itself. Now that’s up to 50- to 60%, again, depending on whether you’re doing a rolling, in this case, one-month look back, either trading days or calendar days. So you have seen a pretty significant pickup in the percentage of stocks that are outperforming the index if you just look back over the last month or two relative to what we saw over the past year because of just how biased up the cap spectrum calendar year 2024 was.

MARK: Thank you, Liz Ann. Jeff, let’s bring you into the conversation. Liz Ann was just talking about sort of the Mag 7 in the US. One of the topics you wanted to talk a little bit about was a new group of seven stocks leading markets in Europe. So tell us more.

JEFF KLEINTOP: Yeah. Well, Europe has been outperforming the S&P 500 for two and a half years now, but it’s been gaining momentum this year. For example, German stocks are up 15% on the year through right now. There’s a new leadership group within Europe, and there appears to be a new Magnificent 7 because there are seven stocks in Europe’s defense index, the MSCI EMU, European Monetary Union Aerospace and Defense Index. They’re up over 30% this year through yesterday’s close. That compares to the US’s Mag 7, which are down about 10%. Now, those gains add to the nearly 180% total return measured in US dollars since the current bull market began back in mid-October of 2022, and that’s double the return of the S&P 500.

The outlook for a further rise in European defense spending got another boost from the Trump-Zelensky meeting on Friday that made it clear to Europe that the US was leaving Europe to its own defense. Since 2014, the European NATO members have promised to spend at least 2% of their GDP on defense, but they only actually got to that number last year. But it’s ramping up, and that 2% target may become a floor for EU defense spending going forward. We’ve got a higher percentage increasingly likely in the years ahead. I think it could be 3%. That would translate to 800 billion euros in spending each year by 2029. That’s four times the level of the mid 2010.

So I think increasing defense spending seems to be one issue that seems to unify Europeans. You’ve got the potential for financing being proposed from either joint EU debt, or the exclusion of defense expenditures from EU deficit rules, and we’re certainly seeing a lot of momentum there on the defense spending side. And frankly, greater EU defense spending seems like a sure thing in a world of increasing uncertainty around tariffs. And that’s one of the reasons why those stocks remain very strong this year.

MARK: So why don’t we stick with Europe for a second. There was an election in Germany a couple of weeks ago. What are the implications for investors?

JEFF: Mostly more spending in Europe, so more fiscal stimulus. There’s been a widening rift between growing public demand for more government spending and the self-imposed austerity mechanism that they call the debt break. That limits Germany’s structural deficit to basically 0% of GDP. Germany is the largest economy in the EU, so this fiscal austerity has kept a lid on overall debt growth in Europe, especially… you know, debt-to-GDP in Europe has basically been flat for 15 years now, especially relative to the US.

And it also seems to have acted as a drag on growth in the region. So following the election, not this past Sunday, but the Sunday before, February 23^rd, the Christian Democrats and the Social Democrats are likely to form a grand coalition government, with the CDUs leader Merz as the chancellor. Now, those parties don’t agree on a whole lot, but what they do agree on is more government spending via reform of this constitutional debt break, and having a more aggressive defense and industrial policy. And that might be achieved through, you know, again, joint debt or excluding some of the spending from the budget numbers. That seems to be the path that they’re on. We got a Reuters report a couple of days ago talking about setting up two large fiscal funds outside of the debt break while they still have that two-thirds majority required to do so in the current lame duck session of the outgoing parliament. That could be 200 billion euros for the special defense fund, and maybe a similar fund for infrastructure. This are some big numbers. So if carried out that could add more stimulus, faster economic growth, and it could support higher stock prices.

And Mark, so far this year, Europe’s Economic Surprise Index, that’s the thing that measures whether data is coming in better or worse than expected, that’s been on the rise. It’s positive and moving up, in contrast to what we’re seeing in the US. So there’s some reason that the data could improve, and that could continue to lift stocks there even in the midst of this US tariff-driven economic uncertainty.

MARK: Thanks, Jeff. Last question for you, probably the question on a lot of people’s minds this morning, tariffs. What are the current proposals and what do you think about their impact?

JEFF: So Trump’s biggest tariffs are now in place, but the situation is still fluid. They could be reduced or reversed soon. Canada is phasing in their retaliatory tariffs. They’ve got more to go into effect after 21 days if the US tariffs are still in effect then. And Mexico, Mexico’s president said she was holding off until Sunday to announce their retaliatory efforts. And both of those things suggest room for negotiation in the coming days, and a chance that US tariffs are reversed quickly. Columbia’s 25% Trump tariffs lasted, I think, nine hours. And recall last time, back on Saturday, February 1^st, the date the tariffs on Mexico and Canada were scheduled for that day, they were announced to go into effect then on February 3^rd. Then on February 3^rd, the market sold off dramatically at the open, but later that day they announced the one-month delay.

So clearly things can be fluid, and there’s still reasons to believe the tariff threats are negotiation tools and could come and go quickly. We certainly expect higher tariffs this year. What we said repeatedly, expect, you know, steps forward and steps back. So it wouldn’t surprise me at all if we saw a reduction or pullback in some of these tariffs. Remember, they were signaled as temporary and in place until illegal border crossings showed some material slowdown. And actually, Trump noted that on a Truth Social post this weekend, talking about seeing the lowest number of border crossings ever recorded last month. So all this points to maybe more room that they could maybe be pulled off fairly quickly.

I would point out that the biggest impact of the Canadian and Mexican tariffs are on US-headquartered businesses, manufacturing businesses like Ford and GM, not on foreign businesses. So a desire to make good on his tariff threats may be balanced by Trump’s desire to have a legacy of restoring US manufacturing.

I think if the tariff threats come and go quickly, the economic and earnings impact may be small, but obviously the longer the tariffs last, the more likely businesses pause investment in hiring, reducing economic growth, and making a recession in both Canada and Mexico likely. We saw this during Trump’s first trade war in 2018 and 2019, when uncertainty over tariffs really slowed business investment in manufacturing.

So markets can be volatile here in the near-term. It’s uncertain what level the tariffs will stabilize at, how long they’ll be in place. In the past, they’ve come and gone quickly. We may want to take a longer-term view here, rather than trying to react to every trade announcement. To the extent portfolios, you know, move away from their target allocations, maybe this is an opportunity to rebalance. Obviously, it’s a very fluid situation.

The next set of tariffs are the steel and aluminum tariffs going into place on March 12^th, Mark. The steel tariffs I think are likely to go in place. The aluminum tariffs may get reduced. We import a lot of aluminum. We don’t have the capacity to make it here from an electrical standpoint. So that would just be another increasing cost to US manufacturers, again, something I would think the Trump administration would want to hope to avoid.

MARK: Thanks, Jeff.

Kathy, I’ve got a few questions for you and then we’ll start taking the live questions. We had, you know, a Core PCE report last week. We’ve got, you know, all the policy turmoil we’ve been talking about. What’s been the reaction to the treasury market to all of this?

KATHY JONES: Well, as everybody knows, yields have been falling, and the reason yields are falling is because the market is looking past the near-term inflation that’s coming from tariffs, and looking at the slowdown in economic growth that’s coming from tariffs. So, you know, tariffs raise prices in the short run. They slow growth. They reduce employment. They create a trade war if that’s what develops, and we see retaliatory tariffs. It slows down economic growth globally, and obviously increases tensions between countries. So a lot of downside pressure on yields from all of that dynamic.

And when you look at what’s going on with, say, commodity prices today, which probably the most direct impact, we’re looking at corn, soybeans, wheat, these are major exports for the US to China. They comprise about 17% of exports to China from the United States in the agricultural sector, you know, seeing those sort of plummet, that’s a deflationary signal, right? That’s a signal that prices are going to fall down the road, particularly for goods that are exported. Meanwhile, goods that we import such as food from Mexico, etc., those are going to go up. But the market is looking through that, and they’re saying, ‘Well, this is going to slow growth. Possibly cause a recession.’

So yields are falling and we’re seeing the yield curve start to invert, which means that the market is starting to see rate cuts coming in sooner rather than later as a result of the expected slowdown in growth that’s coming from this. So right now, the Fed funds Rate is above treasury yields across the curve. The yield curve is kind of bumpy right now, but long-term rates are falling faster than short-term rates, and that’s really the outgrowth of all these anti-growth policies.

MARK: So since you mentioned the Fed, Kathy, tell me a little bit about what your expectations are. You mentioned the market’s expectations. What are your expectations for Fed policy? And I guess more broadly, do you see this decline in yields continuing, or is this something that is a reaction to kind of current circumstances, and it’s sort of done for now?

KATHY: Yeah, I’m sorry to use this term, but it depends. So our view coming into the year was that the Fed would probably cut one or two times towards the end of the year, depending on how inflation and employment perform. And our expectation continues to be that there’s room for some rate cuts, but probably for now the Fed would prefer to stay on hold to see how all these policies play out because, as Jeff mentioned, it’s a very fluid situation and things could change very quickly. But we do still expect one to two rate cuts of 25 basis points each towards the end of the year because even without the tariff business, we’ve seen some signs of slower economic growth, and I do think a mildly declining trend in inflation.

One of the big problems for the Fed is inflation has been stuck around 2-1/2%. They’re not going to abandon their 2% target. So they’re going to need some movement in that direction and/or some deterioration in the labor market in order to justify the rate cuts that I think they’re still biased towards doing.

So very fluid situation, but the way things are going now, I would expect one to two rate cuts by the end of the year.

MARK: What’s your outlook for credit spreads? They’ve been pretty tight, despite what’s been going on, you know, elsewhere in the economy, which could be a surprise. Do you think that trend is going to continue?

KATHY: Well, they’re really very, very tight, and there’s not much room for them to get much narrower from here. But, you know, the fundamentals for the corporate bond market have remained strong. So we’ve been at a point of record corporate profits, good cash flows, relatively low debt levels relative to equity. So you needed to see some deterioration, pretty significant deterioration for investment-grade to see a significant widening from here.

I do think they’ll probably widen a bit from here just because getting any narrower is going to be difficult. But on the investment-grade side, a modest widening in spreads from here, simply a part of a cyclical slowdown in economic growth would be a reasonable expectation. But total returns because coupon levels are high and the fundamentals are still pretty solid, should be good in the corporate bond market.

When you go down into high-yield, of course that’s where you get into companies that may be more adversely affected by what’s going on in the economy. They have higher debt levels. They’re more dependent on economic growth and financing. And so we will watch to see if there is a tightening in financial conditions. So far, not really too much of that taking place, but we’ll watch as things play out. If that happens, then I would be more concerned about the bottom level, particularly the lower level of high-yield, seeing those spreads widen. So be pretty cautious right here on high-yield simply because the economic environment… they’re much more sensitive to the economic environment and tightening financial conditions, and be they’re less liquid. And in an environment like this, liquidity is really important. So spreads can widen very, very quickly because the market is a lot less liquid than investment-grade.

MARK: Alright. Thank you, Kathy.

Let’s start taking some live questions. And Mike, we got a couple questions here about Social Security. Has there been any talk of possible cuts to Social Security benefits in the next couple of years? And then the second one, how concerned should we be about Social Security payment interruptions later this year due to DOGE/federal cuts? So Mike, take it away.

MIKE: Sure. In terms of the sort of broader question about whether there has been any talk of cutting Social Security benefits, it’s not super high on my list of concerns. The president has been pretty clear that he doesn’t favor that. Most of the attention has been on Medicaid, and whether cuts to Medicaid may be coming down the pike, but I don’t see Social Security as a high priority.

The second question I think is an interesting one. I don’t think I’m specifically concerned about Social Security benefit payments being interrupted this year, but more this kind of broader concern around what the DOGE, the Department of Government Efficiency, is doing in terms of letting employees go and then… there’s been a couple of examples of suddenly realizing that they’ve let the wrong employees go and they need to hire back. The guys who are working on bird flu is one example, or the guys who are guarding nuclear silos, they sort of inadvertently fired. And so I think there’s some concern that the cuts are so indiscriminate that they sometimes make mistakes, and that, you know, you kind of fire the wrong people, and then all of a sudden systems are, you know, not working as they should be. So I don’t tie it specifically to Social Security benefits. I tie it to more of a concern that the cuts being made within departments are sometimes having unanticipated effects.

MARK: Great, thank you. Thank you, Mike.

Liz Ann, I’m going to ask you this one. How well does the CAPE, the Cyclically Adjusted Price-to-Earnings ratio do as a tool for estimating over- and undervaluation for market indexes?

LIZ ANN: Well, it does tell you, and has for quite some time, that the market is quite overvalued. So it’s just as good as measure as any. It’s got a long-term look back. It goes over a 10-year period. So you tend to capture both the full up part of an economic cycle and down part of a cycle, and often incorporates both a bull and a bear market, or at least corrective phases, but it doesn’t have any decent predictability in terms of what ultimately the market is going to do. That said, there’s no valuation metric, shorter term, longer term, really any version, that has any kind of meaningful correlation to, say, subsequent one-year returns for the market.

Now, most valuation metrics, including Shiller’s CAPE, if you are looking at subsequent, say, 10-year returns for the market, there is a much higher correlation. So lower Shiller CAPE, or lower forward PE, or lower price-to-book, or the Fed model, or Tobin’s Q, or the Buffett Model… I mean, there’s so many… if you track them against subsequent 10-year returns, there is a higher correlation. And that’s why a lot of valuation metrics are incorporated into long-term market assumptions as it relates to equity market assumptions. But it really doesn’t tell you anything about subsequent one-year returns. Because valuation of any variety is sort of an indicator of sentiment. There are times where the market is richly valued on most if not all metrics, and the market could continue to do well. That happened in the mid- to late-1990s. There are the times where the market is really, really cheap, but it stays cheap because you’re in the midst of a pretty ugly bear market. So we can look at valuation as an important tool to have in our toolbox, but not as a market timing indicator.

MARK: Thank you, Liz Ann.

Jeff, won’t the tariff war be bad for international equities?

JEFF: Get the mute off here. There we go.

MARK: Jeff, we are not hearing you, or at least I’m not hearing you. Why don’t you try that again?

LIZ ANN: I think you put the mute back on maybe.

JEFF: Sorry, A bit of a lag here. Hopefully… can you hear me now? Am I coming through okay now?

MARK: Yes, I can hear you fine.

JEFF: Okay. Sorry about that. A bit of a lag between when I click the buttons.

The Trump tariff war is bad for economies, especially Canada and Mexico, given they’re export-dependent on the US. They could both see recessions the longer these are in place. But it’s not necessarily bad for the companies in those countries. Why would that be? Well, the biggest exporters from Mexico to the US are Ford and GM. Those are US-listed companies. In fact, the top five companies making up more than 50% of Mexico’s stock market have almost no exports to the US. One is a bank, one is a local telecom company, one is a Mexican Coca-Cola distributor, and one is Mexico’s Walmart. Only Grupo Mexico, which is a mining company, has some exports to the US. And that’s true for Canada, as well, excluding their energy sector. So there’s a big difference between how negative it will be for their exports and their economy versus specific companies. It’s far more negative for US companies that are based in Mexico and Canada and exporting their products to the US and those supply chain issues, than there is purely Mexican or Canadian companies. So a big difference there. It’s one of the reasons I think why we continue to see higher earnings estimates, higher earnings revisions for many of these companies in countries that are targeted by tariffs even though their economic revisions are heading lower.

MARK: Alright. Thank you, Jeff.

Let’s see, so Mike and Kathy, we’ve got a bunch of muni questions here. Mike, let’s start with you, and… let’s see… ‘How concerned should we regarding the potential elimination of the tax-exempt status of municipal bonds?’ And the next one for you, ‘What happens to state and local budgets with all the financial changes proposed at the federal level?’ So why don’t you do those both, and then I will go to Kathy with the next muni?

MIKE: Sure. On the muni bond exemption question, you know, where this kind of started to bubble up is about a month ago the House Ways and Means Committee, which is the main committee dealing with the tax cuts aspect of the president’s agenda, they put out a list of probably 50 pages worth of things that could be on the table, and the tax-exemption status, the tax-exempt status of muni bonds was on that list. It was not a list in any priority order, it was just a list for discussion, and everything but the kitchen sink was on that list. So there was a lot of a hubbub about that. I wouldn’t overreact to that. I’m not highly concerned about it. I’m certainly going to be watching it very carefully, because once we get to these details, they’re going to have to find a lot of revenue somewhere. So, you know, I just don’t think it’s a big target that anyone has. At the end of the day, it’s kind of a number that people are looking at. So I’m not overly worried about that.

On the second question about state and local budgets, I think this is a really interesting concept because as Liz Ann talked about a little while ago, you know, the pure numbers of federal employees being laid off is not likely to have a big impact on the overall unemployment numbers or anything like that. Where this starts to get concerning is if there’s a big trickle-down effect to states and localities, whether that’s state and local government employees. Think about non-profits who have a big federal contract or are very dependent on federal funding who suddenly lose that funding. You know, what happens there? So I think that’s something that we’re going to have to really watch carefully. And I’m sorry, my camera just totally disappeared, but I’ll just keep talking for a second. But I do think that’s going to be the boomerang to watch, and particularly how members of Congress react to things happening in their districts.

MARK: Thanks, Mike.

So given all that, Liz Ann, the next question here is pretty simple. What are your thoughts on… or excuse me, Kathy. Given all what Mike was just talking about, what are your thoughts on the muni market from an investor standpoint?

KATHY: Yeah, the muni market hasn’t really been reacting to these proposals because I think just about every time we have a budget discussion in Washington, somebody with a calculator, you know, says, ‘Oh, we should eliminate the deduction for municipal bonds.’ And it never gets done because it hurts state and local governments, and those are the people that are represented in Washington, are supposed to be represented in Washington. So it never really goes through. It does more harm than good. Muni spreads have hung in there. They’re not showing much impact from all of these talks.

So we still think that for people in high tax states who are in high tax brackets, municipal bonds make a lot of sense. The nominal yield of the Muni Index is over 3% now, maybe 3-1/4 to 3-1/2. It translates to a tax-equivalent yield of over 6. As high as 6-1/2-to 7% for some people if you go further out the curve. There may be some bumps in the road, but most state and local governments have a lot of cushion in terms of rainy-day funds and funding that they’ve accumulated over the years.

So we think the muni market looks pretty solid. And as with every other time Washington discusses this, we’re not expecting it to get done just based on history.

MARK: Thanks, Kathy.

Jeff, this one is for you. Let me get the right, exact wording here. ‘Jeff, I asked about China stocks in December, and you were bullish, looks good so far. But how do the tariffs and geopolitical events impact your view going forward? How about the rest of Asia? And I think there’s kind of a party congress going on right now. So Jeff, what are your thoughts about what we may be seeing coming out of that?’

JEFF: Yeah, thanks for that question. Right on all that stuff. So the recent gains we’ve seen in Chinese stocks are up 15% this year, 14.3. They’ve been primarily sentiment-driven. We’ve got this week’s National People’s Congress meeting. It’s on the fifth. Hopefully, going to provide some sizable and concrete fiscal stimulus, particularly now that the Trump administration has played its cards on tariffs. And so stocks could add to those gains. But look, we’ve seen a pretty good runup here. So if at that meeting they under-deliver, it could prompt another bear market in those stocks in China.

What we want to see is them actually deliver the fiscal stimulus that they’ve been hinting at for months now. So this is when they do it. So this meeting on the fifth, the National People’s Congress, is when they announced the GDP target for the year, the employment target for the year, just a lot of these initiatives, and they tend to then back it up with more concrete measures of exactly what they’re going to do to achieve those goals. Now, for years, China has been overpromising and under-delivering on the stimulus. We’ll have to see. There were some concerns in December that it didn’t look like things were going to be urgent enough. GDP did come in around 5% for the year. I’m not sure it was exactly 5% the way they reported it, but it was pretty close based on the numbers that I watch. And that would suggest that maybe there isn’t a need for a bazooka of stimulus here, with the housing market in China stabilizing, beginning to turn around. But there is some urgency now with these additional tariffs. Although only about 3% of China’s GDP is tied to direct exports to the US, it’s still an important factor and weighs on sentiment. And that’s what it’s all about, turning around domestic sentiment and picking up consumer spending. So I do expect them to deliver, and deliver more than they have in the past, but there is some risk around that.

So what I would say is yes, still generally positive about emerging markets, but overall I think the risk level is higher here going into this March 5^th meeting. If they do deliver sufficient stimulus, then I think we continue to see solid gains in the Chinese equity market, which is still relatively attractively valued. But if they underdeliver, and they have a history of doing that, volatility could ensue, Mark. So a little bit of a volatility point here.

MARK: Thanks, Jeff.

Liz Ann, this one is for you. I hate to ask this question, but is a recession becoming more probable?

LIZ ANN: More probable? Yes. The probability is not terribly high now. There are a number of recession probability models out there. One that I track on Bloomberg did just jump in the last week from 20% to 25%, I think heightening those concerns, is what Kathy already addressed, with the inversion of the yield curve, certainly, you know, 10s and 3s, and 10s and Fed Funds Rates. So that sometimes puts recession more on the radar for a lot of economists. Obviously, we already talked about the Atlanta Fed GDP Now, which is a nowcast. Again, it’s not a forecast. It tracks data as it comes in. That has dropped to a negative 2.8% for the first quarter. There’s still another month’s worth data to come in, but that has elevated concerns about recession. We did see the ISM Manufacturing Index tick down, and every component went in the wrong direction. New orders declined, employment declined, and unfortunately prices paid kind of went parabolic on the upside. We’ll have to see whether it’s corroborated by services. But I would certainly watch that because we had had a hope for improvement on the manufacturing side of the economy. That may be stalled by virtue of uncertainty with regard to tariffs. But we had started to see a bit of a rolling over on the services side based on the combination of ISM and S&P Global’s version PMIs. But that is something to watch because the new orders component, especially in manufacturing, the ISM Manufacturing Index, is a key leading indicator. The yield curve is a key leading indicator. The S&P 500 is a key leading indicator.

Now, the LEI, the Leading Economic Index did not appropriately forecast a recession because the weakness stayed concentrated in the manufacturing side. It didn’t ultimately morph over to services, at least not yet. So I think really key will be the data that comes in on the services side, and if that continues to weaken, I think that too would add maybe to some upper pressure inside these recession probability models.

MARK: Thanks, Liz Ann.

Mike, a couple questions for you. Do you have an update on the DOL Rule? And are any tax law changes pertaining to 401(k), 403(b) and Roth under consideration?

MIKE: Sure. On the DOL Fiduciary Rule, you know, look, everything that was sort of in the queue from the previous administration from a regulatory standpoint, I think a lot of it is just going to disappear and gather dust. The DOL Rule is already likely to lose in courts now. I think the government is not likely to fight back on that. So I think the question then becomes, you know, is there some different vision or different rule that will come out farther down in the Trump administration? The labor secretary hasn’t even been confirmed yet. That should happen very, very soon. So I think we’re a ways from having any real direction on that.

In terms of the tax treatment of retirement accounts, you know, I just generally don’t see retirement savings as a huge priority in either direction at this time on Capitol Hill. We passed the two versions of the Secure Act over the last seven years. A lot of that is still coming online and into effect. I don’t anticipate, you know, the tax cutters going in any direction on retirement savings. So not a big worry. Obviously, everything is sort of in the mix, so I’m going to be keeping an eye on it, but I don’t see that as a big priority.

MARK: Thanks. Thanks, Mike.

Kathy, a question for you, we, I think, talked about in the past on these calls about how, you know, kind of currency markets can be a little bit of the canary in the coal mine about a company’s… or excuse me, a country’s kind of economic policies. What are you seeing in terms of the current currency markets in light of a lot of this policy uncertainty that we’ve been experiencing?

KATHY: Yeah, you know, the dollar initially when tariffs were threatened moved up. As is the normal kind of reaction in the market, the currency market tends to try to adjust for the expectation of the impact of tariffs. So if tariffs are up by 10% versus goods coming in from Mexico, you would expect the Mexican peso to fall by something close to 10% in order to offset that price increase. It’s not a one for one, but oftentimes that’s how it works. And we saw that initially. Now, though, we’re starting to see the dollar actually soften a bit, and I think this is more in reaction to the prospect of slower growth in the United States relative to perhaps other countries, and that leading to a narrowing of those interest rate differentials. So at the end of the day, the interest rate differentials are a real major driver, and what we’re seeing is expectations for the Fed possibly to cut sooner rather than later, and those differentials to decline. And so that is putting a little bit of downward pressure on the dollar.

But again, this is just a lot of chopping around for the time being. And because we don’t know kind of how this end game is going to play out, I wouldn’t bet against the dollar, but I do think there’s some downside here if this plays out the way it’s looking today, in that it will slow economic growth, it will worsen US asset prices, and that will mean less inflow of capital to the US.

But remains to be seen. Very, very choppy. You still have over 200 basis points in differential between where US rates are and those in most of the developed world. And so that is a counterweight, that is a headwind to a dollar decline versus some of the major currencies. But if that shrinks and continues to shrink, then that’s going to leave some room for the dollar to come down and those other currencies to appreciate.

MARK: Alright, thank you. Thank you, Kathy.

We are getting close to the end here. So last question for everybody. What’s one thing you want viewers to kind of take away from your comments today? Mike, let’s start with you.

MIKE: Sure. You know, the next thing on the docket here in Washington is a potential government shutdown next week. I don’t know whether they’ll get a deal, but a shutdown is a possibility. Historically, not a big market mover, but maybe a little concern that it just adds to the market uncertainty, and particularly the market concern that, you know, everything is chaos and dysfunction in Washington, and that planning is getting difficult for companies. So that’s my big worry.

MARK: Thanks, Mike.

Liz Ann, what’s one final thought from you?

LIZ ANN: Well, I did see a follow-up question come in about do you think we’ll have a recession in ‘25? It’s hard to answer because of policy uncertainty. I think if the tariffs were to stay in place, and retaliations were to stay in place and maybe even kick in from here, I think it’s a distinct possibility. In the meantime, we’ve seen the shift toward defensiveness in terms of market leadership, healthcare and consumer staples doing well. Still think it’s not the best way to approach investing within the equity market to do it monolithically with sectors because there’s so much sector volatility and rotations. Instead, we continue to focus on factors, and the factors we think you want to emphasize are quality-oriented factors, but also factors like low volatility, positive earnings trends, strength of balance sheet. I think that’s what you want to kind of snuggle up to within the equity market to maybe lessen the blow of some of this volatility.

MARK: Thanks, Liz Ann.

Jeff, final thought from you. Uncertainty is high, and when it is we know that diversification can be your friend. International markets are pulling their own weight now and offering you not only some diversification from US-driven volatility, but also some gains. A lot of the factors that Liz Ann talked about also are more prevalent in international markets right now. So continuing to focus on that widening gap in international outperformance this year.

MARK: And Kathy, we’ll give the final word to you.

KATHY: Yeah, I would echo much of what has been said already about the value of diversification. I would say in the fixed income world, the one thing, you know, that stands out right now is when there’s a lot of volatility, the safety and liquidity of high-quality fixed income in a portfolio can really be an asset. And I will emphasize the liquidity. A lot of asset classes can get less liquid when there’s a lot of volatility. Treasuries, high-quality, fixed income maintain their liquidity. So that, along with pretty decent yields in this environment, make it an attractive… and effective asset class for allocation.

MARK: Okay, we are out of time. Mike Townsend, Liz Ann Sonders, Jeff Kleintop, and Kathy Jones, thanks for your time today. If you would like to revisit this webcast, we’ll be sending a follow-up email with the replay link. To get credit, you need to watch for a minimum of 50 minutes, and you must have watched it live. Watching the replay doesn’t count. To get CFP credit, please make sure to enter your CFP ID Number in the window that should be on your screen right now, and then Schwab will be submitting that credit to the CFP Board on your behalf. For CIMA credit, you’ve got to submit that on your own, and directions for submitting it can be found in the CIMA widget at the bottom of the screen.

We will be back on April 1^st at 8:00 AM Pacific. Jeff, Kathy, and Liz Ann will be the speakers on that call. And until then, if you would like to learn more about Schwab’s insights or for other information, please reach out to your Schwab representative. And thanks, again, for your time, and have a nice day.

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