COLLIN MARTIN: I'm Collin Martin.

LIZ ANN SONDERS: And I'm Liz Ann Sonders.

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

LIZ ANN SONDERS: Hi, Collin. Well, it's been a wild week, certainly in the stock market, some action in your neck of the woods, too. We mentioned last week that the Consumer Price Index (CPI) report would loom large this week, and we obviously have those numbers, and we've seen some more up and down volatility in the market. So Collin, what's your take in terms of the Fed outlook on where we stand now and just your thoughts on the economy through the eyes of the bond market?

COLLIN MARTIN: Well, where we stand Fed-wise, the CPI print just supports our view. So our outlook is unchanged. We think the Fed will likely continue to raise rates. We expect a rate hike next month at the December meeting. And then we expect another hike in early 2027. And yeah, the CPI print really just supports that view. Inflation's just too hot right now. And you know we've talked about this a lot with our broader organization at Schwab in terms of, you know, what's happening with inflation. And it seems like it's just, it's a sticky issue, maybe not necessarily a significant reacceleration issue, but it's clearly still sticky.

You know, if we look at the core CPI, which is very important for us and for the Fed, which strips out volatile food and energy prices, you know, it rose by 0.3% in October. Again, it was its third straight monthly gain of 0.3% or more. And on a three-month annualized basis, it rose to 3.75%, which was its highest three-month annualized change in about 2.5 years. So still just too high. And it's not just an oil or a tariffs and goods story. You know, we're seeing it in services too, core services prices continue to rise. And that's really what the Fed can control. You know, we've talked about this ad nauseum. The Fed can't impact the price of oil, necessarily. It can't change what's happening in the Middle East, but they can try to impact what we as consumers do and what businesses do.

And then with this release, and over the past few days and this week while we're recording, we've heard from a number of Fed officials, which just makes the likelihood of a rate hike even more likely. So Fed Governor Christopher Waller made it very clear. It's kind of funny because, you know, Fed Chair Warsh doesn't really want forward guidance, and Chris Waller came out and basically said, "I think they should hike." And then he took it one step further and said, "Maybe we see a 50-basis-point hike," or a half a percentage point hike.

That's not our base case, but I don't want to dismiss that risk. You know, we'll see what happens over the next few weeks. But I don't think a 50-basis-point hike would be on the table. But it wasn't just Waller, Dallas Fed President Lorie Logan said that, you know, more rapid rate hikes are possibly needed this winter, which means, you know, over the next few months. And then I thought this was interesting. I'm sure you caught this when it came out. Chicago Fed President Austan Goolsby described the CPI print as "borderline disturbing." Now, I don't know if I'd go there, but it just shows that inflation is still very much here.

It's still sticky, and the Fed needs to take care of it. I mean, that's half of the Fed's mandate. The labor market seems fine. Inflation is not fine. And they need to do what they need to do to get it back down. Now, you asked about "What does that mean for Treasury yields?" Well, I think it means when we look at the balance of risks with Treasury yields, it still means yields are probably biased higher. And we think about the fed funds rate, the Fed only controls short-term interest rates. But all maturities are indirectly influenced by Fed policy. And if there's uncertainty about the potential for the number of hikes, but if the risk seems to be more, that could maybe pull yields a little bit higher from here. And we saw that this week. So the 10-year Treasury yield touched 5% again after it had fallen closer to 4.8% in late October and early November.

And then on the economy, this is where things get interesting. And I want to hear your thoughts, Liz Ann. So you know, the Fed will likely continue hiking rates. And we're in this environment that we've seen for the past few years where I would say the Fed's in a difficult position because there's parts of the economy that just aren't very rate-sensitive right now. You know, we know that the housing market, if you're looking to buy, it's a very difficult time to buy right now with mortgage rates where they are.

But if you're locked in at a low rate, and you have no plans of moving or selling your house anytime soon, you know, the rise in borrowing costs might not bother you. And then, you know, when we think about demographics, you know, we have this whole, I'm going to overgeneralize, but the Baby Boomer generation that has just a lot of assets and probably not a ton of rate-sensitive liabilities. And so their spending might not be influenced or impacted by a rise in rates.

Now, I think where we will start to see it is on the business side of the equation. You know, companies, they borrow a lot more frequently and regularly than us as consumers. And I think we'll probably see some pain there for some businesses, the ones that are the most indebted, the ones that maybe have volatile cash flows, and as they start to see your higher interest expenses kind of eat into their profit margins. But I think it's a tricky situation because a lot of, I think, from a consumer standpoint, there's probably a lot of consumers that that aren't going to be impacted too much from any potential rate hikes, at least maybe by a small degree. So what are your thoughts on that?

LIZ ANN SONDERS: I'm glad you mentioned that, you know, everybody's sensitivity to rates depends on their circumstances, whether they're already a homeowner or they're looking to buy a home. And I think we can think about the economy that way. And this is not really a discussion about the K-shaped nature of a lot of aspects to our economy, which is still alive and well, you know, upper-income consumers doing better than lower-income consumers.

But I think even inflation data is very personal. And what I mean by that is everybody's inflation rate is different depending on, are they big consumers of energy products like gasoline? You know, do they have an hour-long commute in a car every day to work? So everybody's inflation rate is different. Everybody's economic experience is different.

I think that there's also bifurcations happening now when you look at data related to the background of the lending environment. And you're seeing things like delinquencies and defaults problems, whether it's with consumer loans, with auto loans, are starting to accelerate a bit, but generally down the quality spectrum, more in the subprime categories. And that's really where you're starting to see a lot of cracks. You're not seeing it, you know, fully up the spectrum to higher quality borrowers. You see that, to your point, Collin, specific to corporations that have a potential need to borrow. You're particularly seeing that down the size spectrum where within the small-cap universe, let's use the Russell 2000 as an example of that, you've got about a 20-percentage-point spread in favor of outperformance by the profitable companies.

You also can break it down into, you know, low debt-to-equity companies, the stocks of those companies performing much better than high debt-to-equity companies, the stronger in general balance sheet companies performing better than the weaker balance sheet companies. So that's where you can go a little bit more granular as it relates to where we are from a monetary policy standpoint and from a longer-term interest rate standpoint and see where you break out the winners versus losers. And that is where you find that greater connectivity in in terms of the reaction function to whether it's prospects for what the Fed is going to do or the volatility that we're seeing in the long end.

It's also interesting that, we've talked a lot about on this program up until very recently, what had been an inverse relationship between bond yields, specifically the 10-year yield, which has the greatest connectivity to the equity market. For much of this year, back to about March, we have seen a pretty deep inverse relationship between bond yields and stock prices. So when bond yields were moving up, that tended to cause problems for the equity market and vice versa. Very recently, just within the last couple of weeks, we have seen that correlation move back into positive territory to a small degree, but nonetheless, back into positive territory, where we still have very much an inverse relationship is between oil prices and the S&P 500®. So higher oil prices tends to bring lower equity returns on whatever given day or week we're seeing a move in oil prices. So that inverse relationship has persisted.

The other thing I wanted to mention as it relates to the equity market is, yet again, we're just in this massive rotation mode right now. You and I are taping this on Wednesday the 11th, and we are seeing huge swings. You know, we've had these days and even weeks of significant outperformance by some of the more defensive segments of the market, things like health care and consumer staples. Yet as we're recording this today, it's a boom day in the technology space. And you've got healthcare at the bottom of the ranking. This is just on an intraday basis, but my point is that these rapid-fire rotations continue to really define market action.

And I'll just reiterate what we have been talking to our investors about is we think we're going to continue to be in a rotational market, trying to gauge in advance, whether it's at the sector level or even at the subsector level, "OK, what's the shiny new object going to be for the next trading day or a few trading days or even a week? And let me get ahead of that." That's a fool's errand. That's a really difficult thing to try to do. If anything, the way to take advantage of some of these big swings is to let rebalancing help you stay in gear, by at times, you know, trimming where there's been outsized strength, adding to where there has been outsized weakness relative to your own strategic asset allocation or your own, you know, kind of standard equity exposure and stay in gear that way as opposed to trying to get ahead of these rotations. But I think that we're going to continue to be in an environment where the economy has a lot of rolling growth periods and rolling contraction periods at the sectoral level. And now I'm talking about segments of the economy, not market sectors, but I think there's a tie-in to what is likely to continue to be a pretty rotational and churning market.

COLLIN MARTIN: It's funny. That was going to be one of the things I wanted to throw your way about this rotation idea. So I want to dig into that a little bit. And I totally agree and I think it's great, a great suggestion and guidance for our listeners to not always be reacting too much about what's going on in the markets. But like what should our listeners … how should they be implementing what you're talking about there? Like if they're not going to be moving, you know, every day or week with the big moves, is it kind of, see how every investor is going to be different, kind of see how their portfolio looks and maybe adjust every few months, something like that?

LIZ ANN SONDERS: Well, I'd say have it be less about the calendar and more about the size of moves. And one of the ways you can do that from a rebalancing perspective, and there are implications, every investor is different. If you are adjusting your rebalancing process, and it means a higher amount of turnover, every investor needs to be mindful of that. What are the implications of that? Is it a taxable account or a non-taxable account? So that's what you sit down and talk to your financial consultant or your advisor about, assuming you're working with one.

But a lot of formal structures around rebalancing are done based on the calendar. It might be an annual rebalancing or a semi-annual rebalancing. The mutual fund complex tends to do its rebalancing during the last week of every calendar quarter. I like to think more about portfolio-based rebalancing, and it might be setting bands around exposure, whether it's to certain asset classes or at the sector level or maybe even at the subsector level, where a trigger to maybe do some trimming or do some adding comes from moving outside of those bands without it being purely driven by the calendar, just sitting around and waiting until the end of the month or the end of the quarter.

But again, any increased turnover that might be associated with that needs to be taken into consideration, depending on what kind of investor you are and what type of account you have.

COLLIN MARTIN: Let's stay on the stock topic here, and let's look back to last week. You know, last week we saw a huge decline in the stock markets. And I think the big question is … I think there's two questions for me, and maybe there's more for others, but you know, what was that telling us, if anything, right? Is it a warning sign? Was it an overreaction? And then most importantly, how should investors focus on that? And, you know, or the idea of the "buy the dip." What should investors be considering following last week's, you know, big drawdown?

LIZ ANN SONDERS: Yeah, that's a great question, Collin. So let me go back to the day after the midterm election last week, which was a strong up day. Digging into what was happening that particular day, you did see a lot of chasing of that upside performance, less so by the retail trader/investor, more by some of the shorter time-horizon institutions, some of the hedge funds.

And in many cases, a lot of that institutional community took protection off. They took hedges off. They were sort of leaning into that strong up day. Then the following day happened where you had a 6% drop in the Nasdaq, 4% drop in the S&P 500. And on that day specifically, there was a lot of scrambling to put protection back on, to put hedges back on.

And so that's why you saw that extreme difference occur in just those two back-to-back days. Also, this is a bit of an aside, but a really important message, I think, to individual investors who look at some of these single-day big moves and think, "Oh my gosh, is the end of the world coming?" Some of the single best-performing individual days in the history of the stock market have come immediately following some of the single worst days in the stock market.

You tend to get these back-to-back moves. And that's just a message about be careful about reacting in a large-scale way to a big move, you know, particularly in the direction of that big move. "Oh no, a big drop in the Nasdaq or the S&P. Is that a sign of impending doom? I should get out now."

You tend to get these rebound days, and it works in both directions. Some of the biggest down days have historically come in the immediate aftermath, call it a day or two after some of the biggest up days, and vice versa. So that's an important message. What is interesting though is that on that big down day last Thursday, there was not a lot of dip buying on the part of the retail investor or the retail trader.

There's a lot of firms that we get research from, one in particular, Vanda, that tracks us on a day-to-day basis. And it was sort of crickets in the retail buying crowd last week. And that's another reason why you didn't see the kind of intraday bounce you often can and have in the past when the retail crowd has been in that buy-the-dip mode. Their interest in buying has kicked back in a little bit. But I know yesterday, which is Tuesday the 10th, we saw the second largest amount of retail buying in NVIDIA in the history of data on that stock. So we now may be in a position to yet again see some buy-the-dip mentality by the retail crowd. How long-lasting it is, I don't know, but just wanted to put that fine point on it in terms of what's happened this week.

COLLIN MARTIN: And we kind of saw similar things in in the bond market also. And I remember when we recorded last week, you know, we recorded the day after the election and we discussed, we said, "Let's not talk too much because we don't … it takes a while to really figure out how things are going to play out." And then we saw that, right? We saw a nice increase in stocks the next day and then followed by the huge decline. So I think that was prudent to not really predict what was going to happen.

But we kind of saw that in bonds also, where we saw Treasury yields generally fall on the news of the election, just, I think generally due to political gridlock. If there's gridlock, if you have a Democratic Congress and a Republican administration, the odds of a big tax package or a big spending bill are pretty low. And maybe that took fiscal concerns, maybe off the table to a degree. But here we are a week later, and the 10-year's back up to 5%. So you know, things can change pretty quickly.

We've long held that we don't think fiscal concerns are the key driver of Treasury yields right now. We do think it's more about the economy, inflation, and expectation for the Fed. So that's part of the reason why we think there's some upside potential with the 10-year Treasury yield right now. Maybe not a ton, but I think it's biased upwards.

One, I guess, question even though I just said we didn't want to talk about what the election impact is. You know, we're a week out, you know, does this change anything, I guess, now that things have settled down. Interested in your thoughts there.

LIZ ANN SONDERS: Not quite sure yet. It really depends on what the policy priorities are. You know, we'd certainly have to think about policies in some cases that are in place that, you know, much around tariff policy. They're, you know, the Democrats don't have the same view around the benefits or lack thereof of tariffs, but that's something that the president has a decent amount of unilateral authority. You know, the president also talked about wielding the veto pen a bit more often. So even there, I think it's premature to judge the impact on the market because of course they don't formally sit in their seats until January. But that's what we're going to be paying attention to. And you and I both try to stay out of the, you know, political muck and partisanship and really just talk about what are the policies and how do those policies impact investors?

And that's what we're going to flesh out. And that's what our colleague Mike Townsend, who … plug for his WashingtonWise podcast, that's what he's going to be spending his time doing, and we'll get to benefit from his great knowledge and then figure out, "OK, what do these policies proposed or otherwise mean for investors in an actual concrete nonpartisan way?"

COLLIN MARTIN: Yeah, Mike has great stuff, but I just love that we have him at Schwab, that when we get those questions, we can just say, "You know what?"

LIZ ANN SONDERS: Phone a friend. Yeah.

COLLIN MARTIN: Go talk to Mike. Yeah, we'll phone a friend. I love it.

All right, Liz Ann, well, let's look ahead to next week. What is on your radar and what do you think investors should be watching?

LIZ ANN SONDERS: Yeah, so it's a fairly busy week next week. We've got … well, the ADP data comes out on a weekly basis, but I think any jobs-related data is an important to keep an eye on. Retail sales, that's always an important one, obviously as a proxy for the health of the consumer. We also get import and export prices. That's increasingly important because so much of the AI data center build-out, which there's an example of something that has potentially changed here with the election is the speed and amount of money being spent on data centers and how much that might roll back. But a lot of the data center build-out, the equipment that is needed, that is largely on the back of imports. So a lot of that buildout is import related. And that matters because the import growth doesn't feed into domestic, Gross Domestic Product. The D in GDP is "domestic." But also if we continue to see higher import prices relative to exports, that influences the broader inflation discussion.

We also get the NAHB, which is National Association of Home Builders, the Housing Market Index, that's a builder sentiment index. We also get mortgage applications, so those two are very much tied to what the rate backdrop is. We get some other housing data, housing starts, building permits, those are both leading indicators. I know the FOMC minutes are on your radar. I think there's also the TIC flows, so I'll toss it back to you on what I'm guessing are those two things that are on your radar for next week.

COLLIN MARTIN: That's right. I was afraid you were going to start talking about that. And I was going to say, "Hey, that's my corner!"

LIZ ANN SONDERS: That's my corner. No no no, I'm not stepping on your toes. We stay in our lanes other than where the obvious overlaps happen. So back to you, Collin.

COLLIN MARTIN: Well, you know me well because that is exactly what I will be looking towards and at next week. Yeah, we get the Federal Open Market Committee minutes from the previous meeting. We get that next Wednesday. There's two things that that I'm going to be looking for. And you know, I don't know if we're going to get specific answers, but one, you know, why did they hold? You know, obviously it's not going to answer that question, but I want to see what the discussion was and what some of the pushback was because obviously we can see now that inflation's still sticky.

And the data, I think, suggests they should continue to hike. So I'm curious to see what that discussion was behind the scenes because at each meeting we get a very brief statement and then we hear from Fed Chair Kevin Warsh. I want to see what that discussion was. And then to see if there was any context around the decision that was announced to reduce the number of meetings that actually focuses on a policy decision. So next year, one of the meetings is not going to have a decision. It's meant to focus on, you know, big-picture strategic, monetary policy discussions and conversations. I'm curious to see if there's a why or some kind of rationale in there.

And then you mentioned the Treasury International Capital, the TIC, which we get from the Treasury. It gives us an idea of who's buying or selling U.S. Treasuries. There's always a lag with that. So the release we're getting next week is for September. But it'll be interesting to see how the flows look because yields had steadily been rising. And so we'll see if the rising yields kind of attracted more demand, both from officials, you know, official governments and central banks, as well as private investors.

And then over the next, you know, few weeks, we're really going to be paying attention to comments from the various Fed officials. So if we look at next week, there's no shortage of officials that are on the calendar to kind of see what they're thinking, because we know that Warsh isn't giving us much, but we can kind of dig into what other officials are telling us to get an idea of how many hikes might be on the horizon. Maybe we'll see if there's any other support for the potential, you know, half a percentage point hike that Waller kind of threw out there this week. So I'll be focusing on that as well.

LIZ ANN SONDERS: All right, well that's it for this episode. To all of our listeners, thank you so much for tuning in. We really do appreciate it. And if you don't want to wait a week for a new episode, you can keep up with us all day, every day, both of us in real time on social media. I'm @LizAnnSonders on X and LinkedIn. Massive rash of new impostors over the last couple of weeks. So my normal PSA, please make sure you are following the real me.

COLLIN MARTIN: And I'm @CollinMartinCS on both X and LinkedIn. It's Collin with two L's, and the CS is for Charles Schwab. You can find all of our written reports, which tend to include a lot of charts, a lot of graphs, tables, great visuals. You can find them at schwab.com/learn. That page is updated every day. And with not just our content, Liz Ann. We have content from a number of our colleagues, from equities, fixed income, macro, the economy. Plenty of good content there.

And if you haven't already, please consider leaving us a review on Apple Podcasts, a rating on Spotify, or feedback wherever you listen. And we'll be back with a new episode next week.

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