LIZ ANN SONDERS: I'm Liz Ann Sonders.

KATHY JONES: And I'm Kathy Jones.

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

KATHY: Well, Liz Ann, we publish these podcast episodes on Friday mornings, and this Friday morning, we'll be ahead of the long-awaited speech from Fed Chair Powell at Jackson Hole, Wyoming, that annual confab where we hope to get some news. But before we get into that, I wanted to ask you about the article you published recently on Schwab.com. That's an update on your reflections in this industry.

And you know, there's just a ton of great quotes in there, and many of them are really relevant to the moment we're living in right now. So which quotes or sayings have you had in mind over the past few weeks or months?

LIZ ANN: Yeah, I mean, there's so many, and I put a lot of them from some of the greats, including our own Chuck Schwab and Marty Zweig, my first boss in this business, the late great Louis Rukeyser, the late great Sir John Templeton. I cite a number of those dog-eared books that we, I'm sure, have all read over the years: Random Walk Down Wall Street, The Money Game, one of my favorites, Extraordinary Popular Delusions and The Madness of Crowds, and Against the Gods. But I'm always intrigued by some of the comments made within those books and what we've heard from the legends about speculation. Edwin Lefebvre, who wrote probably my favorite book, which is Reminiscences of a Stock Operator, said that "Speculators buy the trend; investors are in for the long haul; 'they are a different breed of cats.' One reason that people lose money today is that they have lost sight of this distinction. They profess to have the long term in mind yet cannot resist following where the hot money has led." So those are the ones that resonate with me. Marty once said, "Patience is one of the most valuable attributes in investing," which I think always holds true. Burton Malkiel said in his book, "It's not hard to make money in the market. What's hard is to avoid the alluring temptation to throw your money away on short, get-rich-quick speculative binges. It's an obvious lesson, but one frequently ignored." And then Benjamin Graham, in his book, said, "The investor's chief problem, even his worst enemy, is likely to be himself." And then the last one I'll just throw out there is from the great Peter Bernstein, who wrote, "The information you have is not the information you want. The information you want is not the information you need. The information you need is not the information you can obtain. The information you can obtain costs more money than you want to pay." And as we swirl in this world of information, that one is always somewhat resonant. I know you've been in the business, Kathy, just a little bit longer than I have, although we're pretty seasoned, I wonder what, if you think back to, you know, books you've read or memories that you have of some of the legends and what has resonated with you over the years.

KATHY: Well, yes, I have actually been in the business a bit longer than you. So you're being kind to compare our tenure. But you know, so I started in commodity trading on a trading floor, and many of the sayings are not repeatable on this podcast. But I did work with some real legends and certainly was in the presence of some real legends in trading over the years. Jack Schwager, who wrote Market Wizards, was my boss for a very long time and really taught me so much about this business, about trading …

LIZ ANN: I have it on my bookshelf. Right to my right.

KATHY: Yeah. He was a terrific teacher, along with someone else at the firm at the time that I worked with, who really took me under his wing and taught me a lot about trading.

But there's no replacement for just kind of getting in there and losing your own money to figure out, you know, how these things work. But I think the best sayings were always about, similar to yours, about taking the long view or managing risk. And so it was always, you know, about pigs getting slaughtered, right? If you just get too greedy and too aggressive, you lose your discipline. You are going to lose money along with it. And so those are the sayings that I remember pretty well. Those are the lessons I remember as well. The ones where you're kind of learning the hard way that this is not a game. This is a long-term project. We will be sure to link to that article in the show notes. I think it will be one people like to refer back to.

We'll also link to that YouTube video of Marty Zweig calling the crash of '87 on Wall Street Week. That was a really iconic moment that a lot of people still replay. And you know, occasionally that clip will get posted somewhere and it actually goes viral. So still worth watching as a bit of history that everyone should use as a lesson.

LIZ ANN: It really was uncanny, and I remember thinking at the time, I was only a year in the business, and I worked for him. So I certainly knew that there had been a level of bearishness that had crept into Marty's psyche in advance of that, but just how precise he was in that sort of prediction of what was going to happen and how quickly it unfolded. But I remember thinking, because we were asset allocators, and we had gone from essentially fully invested in equities in relative terms down to only about 20% in the lead into the crash. So my naive 22-year-old or 23-year-old thought, "Well, what's the big deal? Why is everybody freaking out? You anticipate a crash before it happens. You take your money out in advance of that. And then when the crash happens, you start buying. What's the big deal? Easy peasy."

KATHY: You know, that was the theory. Yeah, I do remember that I was trading bond futures at the time. And of course, the bond futures market did extraordinarily well in a short period of time. But the folks who were trading S&P futures had a real bloodbath. And I do remember a friend of mine walking off the trading floor after they finally resolved all their outtrades, you know, where you try to pair up trades that didn't pair up the first time around.

And it was … he got done at like three in the morning. Everyone was trying to pair up these trades and clear things up. And he turned in his jacket. You know, they all wore the colorful jackets. 

LIZ ANN: Yep.

KATHY: And he turned it in. He said, "OK, I can't do this anymore. I got done. I could have lost everything I ever had, plus everything I was going to have in the future. I can't do this anymore." And it was a pretty dramatic moment. 

LIZ ANN: You know, Kathy, I'm glad you brought up that show, which you're right, it does tend to go viral when it gets reposted on YouTube, but I will never forget what Louis Rukeyser said in the opening to the first show that he had following the crash of '87. So would have been five days later, because the show was on Friday nights, and he just looked right in the camera and said, "It's just your money. It's not your life. The figures on a broker's report mean little compared to that. The people who loved you a week ago still love you today." And I just thought that was a beautiful reminder for people.

KATHY: Yeah, that's a good one for people to take away. It's a good reminder of what's important in life, right? I do remember one now that I can repeat. It's from Richard Dennis, who was a very big commodity trader back in the day. And what he said is, "I've learned that markets, which are often just mad crowds, are often irrational. When emotionally overwrought, they're almost always wrong."

LIZ ANN: Absolutely.

KATHY: That one resonates with me. Usually when we're at our craziest, we're usually wrong.

So let's move on to this week.

One of the big stories is one we've mentioned several times in the past on this podcast, and that's the Federal Reserve's annual conference at Jackson Hole, Wyoming. Just a little background, the Jackson Hole conference is officially called an economic symposium. It's hosted by the Federal Reserve Bank of Kansas City. It's been held in late August at the Jackson Lake Lodge in Wyoming every year since 1982, although it was virtual during COVID. It was originally because Paul Volcker liked to go fly fishing, and this was a good way for him to have that opportunity and still be conducting business. 

For people who aren't as familiar with the Federal Reserve System, it divides the 50 states into 12 districts, not necessarily along state lines. Each district is managed by a district bank. The Kansas City Bank governs District 10, which includes Kansas, Colorado, Nebraska, Oklahoma, Wyoming, and part of New Mexico, and part of Missouri. So technically, Jackson Hole, Wyoming, is in the Kansas City Fed's jurisdiction. And the story goes that, you know, again, Paul Volcker really wanted to attend this conference, so they held it in 1982 in one of his favorite fly-fishing spots in Jackson, Wyoming, and so for more than 40 years, central bankers and economists from all around the world have gathered there. It's considered quite a coup to get an invitation to this beautiful spot in the Teton Mountains. So every year there's a theme. This year the theme is "Reassessing the Effectiveness and Transmission of Monetary Policy." And of course, this year the timing of the conference lines up with what we think will be a rate cut in September. And that's what everyone's going to be paying attention to. Do we get a good solid signal that a rate cut is coming in September?

LIZ ANN: So Kathy, another story this week. In fact, the news came out as we started taping this, which is fortunate because we're taping this in advance of Powell's speech at Jackson Hole, but much anticipated were the Bureau of Labor Statistics' annual benchmark revisions to the annual data through March of this year, and they got delayed. So we were going to have to prospectively riff on data we didn't have, but fortunately they did just come out. And I don't know about you, but I saw estimates ranging from as low as about an expected 300,000 downward revision to more than a million downward revision, and the number came out at 818,000. So I think the consensus was in the, I don't know, 600 or 700, so.

And this type of annual benchmark revision, again, it's annual, we get it every year, doesn't tend to be a headline grabber or a market needle mover, but clearly more attention is being devoted to it in an environment like this because of uncertainty in the labor market. Do you think it's the kind of thing Powell, do you think he's maybe adjusting some of his notes to address this at his Jackson Hole speech?

KATHY: Probably his language in preparation has already been vague enough to allow for some of this kind of maneuvering. But it does say if we take the numbers, maybe instead of averaging 240-or-so-thousand job gains in the months, it's about 175-ish. In the grand scheme of things, it's not that different. It's still healthy job growth over the time period, but it's a little less robust than, I think, the information that we got at the time. So it probably just reinforces, I think, the bias at the Fed that, yeah, it's time to cut rates. We've heard from a kind of a chorus of various Fed officials that they're getting more confident about inflation. And then when we look at the job market, it definitely confirms it is cooling off somewhat, and all that adds up to the likelihood of a rate cut. I think what people really want to hear about is not just, "Well, will there be a cut in September, but how much will the Fed cut over what time period? What is the terminal rate? Where do they think they're going?" I doubt we'll get any of that definitive information, but that's what the market's going to be looking for, but this this probably just reinforces for Powell that, yeah, it's time to get going.

LIZ ANN: So all else equal, Kathy, assuming, let's say, a benign PCE report, the Fed's preferred measure of inflation, and maybe a benign jobs report, could the benchmark revisions be enough to elevate probabilities of the Fed doing 50 basis points versus 25?

KATHY: Not in my mind. I seriously doubt that the Fed wants to initiate this cycle with a 50-basis-point rate cut just because they haven't been hinting at that at all. They've been dismissing that as a possibility. And it might indicate, I think, publicly, "Oh, we're more concerned than we are about all this." And so I think my best guess is that this won't move the needle one way or another in terms of what the Fed is planning to do. It just reinforces what they're already planning to do. But these are only through March. So this is already August. This isn't even six months since then. So there's plenty more data for them to take a look at. But yeah, it should reinforce it. I don't think it should change it.

LIZ ANN: Yeah, no, I don't either. One of the things that it does is it clears up, not all, by any means, but some of the confusion around the crosscurrents within the labor market data, even within just individual jobs reports. You get two different surveys that are reported every fourth Friday: the establishment survey, which is where payrolls comes from, and then the household survey, from which the unemployment rate is derived. 

And over the past couple of years, there's been about a 3 million difference in terms of a more-muted household survey tally of how many jobs were created versus a much more robust. And this doesn't narrow that gap significantly, but marginally, and helps to clear up some of that confusion. In addition, you've got the unemployment rate, I think up almost a full percent from the low, but that hasn't been corroborated by what we've seen in payrolls, but a slightly more muted pace of payroll gains is maybe a bit more consistent with that move up in the unemployment rate.

KATHY: Yeah, I think as you've pointed out a number of times, one of the features of this cycle is the low response rate to survey data. And that's actually been happening even before COVID, but since COVID, the response rate from both businesses and households has been very low. And that means the risk of getting the wrong numbers, especially the first time around until you gather more data and do the subsequent revisions, that risk is just very high. So I'm not surprised we're getting kind of the outsize revisions in various forms of reports because it's just simply hard to get the data anymore.

So Liz Ann, let's look ahead to next week. What do you think people are going to be watching?

LIZ ANN: Well, it is just chock full of data. It's not a quiet week. Next week you get durable goods. You've got a few regional Fed indexes that come out, Dallas Fed, Richmond Fed, the Chicago PMI. We get both consumer confidence and consumer sentiment. They're put out by two different organizations. Consumer confidence is put out by the Conference Board. Consumer sentiment put out by University of Michigan.

For what it's worth, consumer confidence tends to track a bit more closely to what's going on in the labor market, whereas consumer sentiment tends to track a bit more closely with what's going on in inflation. That helps to explain some of the divergences over the past few years that we've seen between those two. We get the next GDP update. Maybe most important would be Personal Consumption Expenditures, the PCE, which is the Fed's preferred measure. That doesn't tend to be reported well outside the band of where expectations are simply because if you know how to do the math, you can map what you get in CPI and PPI to PCE, but there's a lot of sensitivity, obviously, to inflation. And with Jackson Hole speeches we already touched on, I think any of these inflation data points are important. What's on your radar?

KATHY: Well, all that, obviously I'm going to be paying attention to what Powell has to say on Friday morning. And then we get all that data coming out. And that'll be right ahead of the Labor Day weekend. So it's going to be interesting as the markets are a little thinner than usual, still liquidity not that great. I'm also just watching market reaction to these things. It's very interesting.

You know, the bond market's been very optimistic. We still have an inverted yield curve. It's tending to try to disinvert. It disinverted for like 10 minutes during the panic over the liquidation of the yen carry trade. But we're basically seeing the bond market sort of hang in there no matter what happens. Still optimistic, still anticipating rate cuts, still seeing credit spreads very tight, meaning people are scrambling to buy, you know, investment-grade corporate bonds, even high-yield bonds at these yields, I think in anticipation of yields coming down. So the demand side in the bond market is just tremendously strong, and no matter what comes at it. So keeping an eye, see if that dynamic continues because right now, 10-year yields at 3.80ish are kind of where we have fair value and what our target was for the end of the year. So if we don't see a big change in the data, but we see that demand hold up, that could probably push yields down even more. So I'll be curious to see which factor moves it. Will it be the data that moves it one way or another, or will demand just continue to mean that we grind lower in those yields? And that's going to be, I think for me, that's going to be interesting just to watch how the market performs in this time period.

So as always, thanks for listening. That's it for this week. But you can always keep up with us in real time on social media. I'm @KathyJones. That's Kathy with a K on X and LinkedIn.

LIZ ANN: And I'm @LizAnnSonders only on X and LinkedIn. I am not on Facebook. I'm not on Instagram. I'm not on WhatsApp. There's some other site that I never even heard of before, and I can't think of the name, that I have yet another imposter on as well. But anybody suggesting they're me on any of those platforms is not me. So don't get duped. 

With regard to our real podcast, without imposters, we would really be grateful if you'd leave us a review on Apple Podcasts, a rating on Spotify, or really feedback anywhere you listen. You can also follow us for free in your favorite podcasting app. 

Now we're off again next week. It's that time of the late summer, but we will be back with a new episode after Labor Day. So stay with us.

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